limited to Federal agencies acting pursuant to CERCLA, EPA sees no
reason to require any additional documentation beyond the demand for
payment and the certification. A similar documentary payment condition
is employed in the RCRA Subtitle C closure and post-closure letter of
credit. See 40 CFR 264.143(d)(8); 264.151(d). Requiring only a
certification and a demand for payment also streamlines the claims
process in these scenarios and imposes a lower administrative burden on
the claimants and on the issuing institutions because fewer documents
would require review.
    Other supplementary documentary requirements EPA considered were
the presentation of the CERCLA settlement agreement or CERCLA
unilateral administrative order themselves. However, EPA did not
believe these additional requirements provided significant value beyond
the certification from the Administrator or other authorized Federal
agency. In discussions with representatives of the banking community,
participants suggested a high degree of comfort with a certification
from a Federal government agency as a documentary payment requirement,
provided it was specified in the letter of credit. Thus, to avoid
unnecessary documentary provisions, EPA is proposing that the required
wording of the letter of credit issued in favor of any and all third-
party CERCLA claimants not include a requirement to produce the
underlying settlement or unilateral administrative order, in the
scenarios limited to Federal government claimants.
    Further, EPA is today also proposing letter of credit wording that
does not require that the original letter of credit itself be presented
by claimants requesting a draw. EPA's financial assurance programs
under RCRA Subtitle C (closure/post-closure letters of credit and
liability coverage letters of credit) similarly do not require
presentation of the original letter of credit itself. Such a
requirement would entail a greater level of administrative burden on
both EPA and claimants, in particular due to the wide range of
potential claimants and the need to coordinate between EPA and
potential claimants. In discussions with representatives of the banking
community, EPA was told that banks are likely to prefer that the
presentation of

the original letter of credit not be a requirement and that such a
requirement is a relic of the past. However, this does not mean there
could be no value in such a requirement. The issuing institution may
have noted on the letter of credit any prior payments that may help
keep EPA informed of the remaining balance; however, EPA should be able
to remain apprised of the value of the letter of credit based on claims
and payment notification requirements included elsewhere in the
proposal (see for example Sec.  320.24). On balance, EPA is proposing
to forgo such a requirement to be more consistent with current
commercial practice and reduce the administrative burden entailed in
the claims process. However, EPA solicits comment on whether such a
requirement would be useful.
Draws on the Letter of Credit When Held by a Trust Fund Trustee
(Sec. Sec.  320.40(i) and 320.50(b))
    If the letter of credit is issued in favor of the trust fund
trustee, parties would be able to make claims against the trust fund in
accordance with the terms of the trust agreement in order to receive
payment from the letter of credit. Accordingly, the proposed language
of the letter of credit (Sec.  320.50(b)) would require only a demand
for payment from the trust fund trustee bearing reference to the letter
of credit by number. This is similar to the required documentary
provisions in the RCRA Subtitle C third-party liability letter of
credit when it is issued in favor of a trustee. Other documentary
requirements appear unnecessary under this construction because the
third-party CERCLA claimants would be making claims against the trust
fund instead of the letter of credit and would therefore need to meet
the documentary conditions laid out in the trust agreement or
successfully make a direct action claim against the trust fund itself.
(Payments from the trust fund are discussed further in the trust fund
section of the preamble.) This arrangement provides for a very
streamlined process for the trustee to draw on the letter of credit
when necessary to make payments to the successful claimants. EPA did
not intend to burden this process with extra documentary conditions as
that would only occasion greater fees and expenses on the part of the
trustee and provide no clear benefit beyond the documentary review
already performed by the trustee.
    Such a documentary requirement would also provide the trustee of
the trust fund the ability to make draws on the letter of credit when
necessary to cover trustee expenses. While the proposed required
wording of the trust agreement specifies that fees and expenses would
be first paid by the grantor of the trust agreement, the proposed
language also provides that all expenses not paid directly by the
grantor shall be paid from the corpus of the trust fund which may
require a draw on a letter of credit held by the trust fund. This
allowance is important to allow trust expenses to be covered in
instances where the grantor may cease to exist or is otherwise
unavailable.
    EPA recognizes that, when a letter of credit is issued in favor of
a trustee of a trust fund, the trustee may incur significant fees and
expenses in determining whether or not payment should be made from the
trust fund, particularly in instances of a direct action against the
trust fund. These expenses would likely reduce the value of the trust
fund (and by extension potentially the value of the letter of credit
held by the trust fund). However, given the apparent reluctance of
institutions that issue letters of credit to provide letters of credit
that could pay to a wide range of unnamed beneficiaries and
institutions' expressed concerns regarding the institution itself being
potentially subject to direct action suit from CERCLA claimants, EPA is
proposing this compliance option. EPA requests comment on both options:
(1) Where the letter of credit may pay to CERCLA claimants directly
(i.e. be issued in favor of any and all third-party CERCLA claimants)
or (2) where the letter of credit may pay to the trustee of a trust
fund issued in accordance with the proposed trust fund regulations who
would then pay valid claims (i.e. be issued in favor of the trustee).
EPA is also interested in provisions or specifications that may allow
for lower expenses or fees or that would protect the value of the trust
fund (and thus the letter of credit) from expenses and fees when the
letter of credit is issued in favor of the trust fund trustee.
Direct Action Language in the Letter of Credit (Sec.  320.50(b))
    Under the proposed regulations, the issuing institution would be
subject to direct action claims only when the letter of credit is
issued in favor of any and all third-party CERCLA claimants. Because
direct action is authorized by the statute, the possibility of a direct
action suit should be clearly acknowledged by issuing institutions.
Thus EPA has included required language acknowledging that direct
action suits may be brought against the issuing institution for letters
of credit issued in favor of any and all third-party CERCLA claimants
and that the issuing institution consents to suit in those
circumstances. The language further acknowledges that the liability of
the issuing institution is limited by CERCLA Sec.  108(d) and that the
institution is entitled to the rights and defenses provided to
guarantors in CERCLA Sec.  108(c). The reader should note that this
language is not required for those letters of credit issued in favor of
a trustee. In the latter case, EPA intends the trust fund itself would
be the subject of direct action suits. However, under the proposed
regulations, the issuing institution would be subject to direct action
claims when the letter of credit is issued in favor of any and all
third-party CERCLA claimants.
    Also included in the direct action language in the letter of credit
is a provision that the issuing institution will provide notice of any
such claims and payments resulting from a direct action to the
Administrator. EPA has included a similar provision applicable to the
owner and operator in proposed Sec.  320.24, under which they are
obligated to provide notice to EPA of claims made. However, EPA is
including this proposed term as part of the letter of credit, because
it expects that the owner or operator may not be able to provide such a
notice of payment in a direct action scenario. Providing a mechanism
for EPA to remain informed of claims against the instrument and of the
value of the letter of credit in case of a direct action, is
appropriate for similar reasons as described in proposed Sec.  320.24.
Identification of Facility Information in Letter of Credit (Sec.
320.50(b))
    The proposed language of the letter of credit would require the
identification of the facilities covered, and the amount of financial
responsibility provided by the letter of credit. EPA is today proposing
language that allows (but does not require) a single letter of credit
to cover multiple facilities if that is determined to be optimal by the
owner and operator and their letter of credit provider. EPA anticipates
that allowing coverage of multiple facilities simultaneously may have
administrative efficiency benefits. As discussed in section VI.3.9. of
this preamble, providing for one instrument to cover multiple
facilities may provide for some administrative ease in the compliance
and implementation process and is a common feature of EPA financial
assurance programs.\66\
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    \66\ See for example, 40 CFR 264.143(h).
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    Thus, EPA has made provision in the letter of credit language for
facility-specific sub-limits (i.e. the identification

of an amount available for claims associated with each facility covered
by the letter of credit beyond which the issuer would have no
obligation to pay claims associated with that facility) when a letter
of credit is covering multiple facilities. The proposed letter of
credit would require the EPA identification number(s), name(s),
address(es) and CERCLA Sec.  108(b) financial responsibility amount(s)
covered by the letter of credit for facility(ies) that would be covered
by the instrument.
    EPA recognizes that such information may not typically be included
in letters of credit, where the preference is typically for the
simplest and briefest language possible. However, this approach allows
the letter of credit to reflect the site-by-site amounts of financial
responsibility required, and at the same time, it will assist all
parties (e.g. the issuing institution, third-party CERCLA claimants) in
knowing the amount of financial responsibility available for claims
associated with any of the facilities.
    EPA is also considering whether to limit each letter of credit to
coverage of a single facility. The additional information about other
facilities and facility-specific sub-limits would not need to be
included. In this way the letter of credit could be drafted in a
simpler manner. However, as the EPA is not proposing to require that
multiple facilities must be covered by one letter of credit, EPA
believes the proposed language provides the flexibility to draft a
relatively simple letter of credit. As such, EPA is today proposing
language that allows the letter of credit to cover multiple facilities
if that is determined to be optimal. EPA requests comment on this
proposed provision and the alternative option of requiring only one
facility per letter of credit.
2. Surety Bond (Sec.  320.41)
    An owner or operator would be able to satisfy the proposed CERCLA
Sec.  108(b) financial responsibility requirements by obtaining a
surety bond in accordance with the proposed requirements including the
proposed required wording and submitting the originally signed bond to
the Administrator. Through a surety bond, the Surety would guarantee
that it will pay third-party CERCLA claims for response costs, health
assessment costs, and natural resource damages associated with the
facility against any of the current owners and operators, even if not
listed as the principal on the bond, under certain circumstances in the
event the claims are not satisfied by the owners or operators, up to
the bond limits.
Issuer Eligibility (Sec.  320.41(b))
    The surety company issuing the bond would be required to, at a
minimum, be among those listed as acceptable sureties on Federal bonds
in Circular 570 of the U.S. Department of the Treasury. This
requirement for providers of surety bonds is the same as that in the
RCRA Subtitle C financial assurance regulations which EPA believes has
worked well and will provide familiarity for implementing staff and the
regulated community. In selecting this eligibility criteria EPA is also
taking advantage of a pre-existing Federal examination and
authorization process designed specifically for sureties. EPA
recognizes that a Federal government agency will not be listed as the
obligee of CERCLA Sec.  108(b) surety bonds under the proposed language
and thus Circular 570 listing may not be strictly necessary to comply
with Treasury regulations. However, EPA and other Federal government
agencies are likely to be claimants under the proposed CERCLA Sec.
108(b) construct and thus EPA believes a similar level of oversight of
the solvency of a surety providing a bond is merited. Further, upon
examination of eleven years of data EPA did not identify any instances
of default of a surety listed on Circular 570 suggesting the criterion
is robust. EPA considered additional qualifications for surety
companies but is today proposing the same qualifications as are
required in the RCRA Subtitle C regulations. This decision was based
largely on the desire to not unduly constrain supply, a desire to
leverage the pre-existing robust criterion for sureties already well
established, and to avoid the administrative burden on EPA of verifying
additional qualifications. For more information on the consideration of
alternative provider qualifications, please see the background document
on instrument provider qualifications titled ``Potential Issuer
Eligibility Requirements for Insurance, Surety Bonds, Letters of
Credit, and Trust Agreements and Standby Trust Agreements under CERCLA
Sec.  108(b).''
Requirements To Ensure Continuity of Financial Responsibility Coverage
(Sec. Sec.  320.41(f), (g)(4) and (k))
    EPA is proposing a suite of regulatory provisions in order to
ensure continuity of CERCLA 108(b) financial responsibility coverage.
First, an owner or operator that elected to use a surety bond to
satisfy the requirements of this section would also be required to
establish a standby trust fund and update Schedule A of the trust
agreement within sixty days after a change in the amount of CERCLA
Sec.  108(b) financial responsibility. This standby trust fund would
have to be worded identically to the proposed trust fund language in
Sec.  320.50(a) and meet the same requirements specified for the trust
funds, except that: (1) an originally signed duplicate of the trust
agreement would be submitted to the Administrator with the surety bond;
and (2) until the standby trust fund is funded pursuant to the
requirements of this section, the following would not be required by
the proposed regulations: (1) payments into the trust fund as specified
in Sec.  320.45, (2) annual valuations as required by the trust
agreement; and (3) notices of payment as required by the trust
agreement.
    The second proposed provision designed to ensure continuity of the
CERCLA Sec.  108(b) financial responsibility is the cancellation
provision in the bond. EPA is proposing that, under the terms of the
bond, the surety would be able to cancel the bond by sending notice of
cancellation by certified mail to the owner or operator and to the
Administrator. Cancellation would not occur, however, during the 120
days beginning on the date of receipt of the notice of cancellation by
both the owner or operator and the Administrator, as evidenced by the
return receipts.
    Finally, EPA is proposing that, under the terms of the bond, the
surety would become liable up to the penal sum \67\ of the bond in the
event the owners or operators failed to provide alternate financial
responsibility and obtain the Administrator's written approval of the
financial responsibility provided, within ninety days after receipt by
both the owner or operator and the Administrator of a notice of
cancellation of the bond from the surety. Under the proposal, payment
from the bond into the standby trust would then occur.
---------------------------------------------------------------------------

    \67\ The penal sum represents the maximum amount the surety will
pay for CERCLA response costs health assessment costs and/or natural
resource damages under the bond.
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    A similar arrangement is required under the RCRA Subtitle C
hazardous waste financial assurance regulations for closure and post
closure care and the Agency believes it has been a valuable feature.
EPA believes the standby trust and cancellation provisions are an
important feature of this proposal as bonds could otherwise be
cancelled after a release of hazardous substances from the facility or
after marked financial decline of the owner operator. A CERCLA claim
for payment from the bond would not necessarily be mature

for some time and thus financial responsibility may not be available
when necessary. EPA believes the proposed arrangement however will
ensure that funds are still available to pay the CERCLA response costs,
health assessment costs, and natural resource damage claims of third
parties. This provision, and the similar provisions for other proposed
instruments, as well as alternatives are discussed in more depth in the
preamble section headed `issuer cancellation provisions.'
Claims Against the Surety Bond (Sec. Sec.  320.41(g) and 320.50(c))
    In addition to guaranteeing that replacement financial
responsibility will be obtained in the event the surety provides notice
of cancellation of the bond, the bond would also guarantee payment of
CERCLA response costs, health assessment costs, and natural resource
damages to third-parties. Under the proposed terms of the bond, the
bond would guarantee that the owner or operator would make payments for
or ensure payments are made for CERCLA response costs, health
assessment costs, and/or natural resource damages associated with a
facility covered by the bond as required in a final court judgment from
a Federal court awarding such costs against any of the owners or
operators within thirty days to the parties obtaining the judgment. In
these circumstances a claimant would present the unsatisfied final
court judgment dated at least thirty days earlier from a Federal court,
in favor of the claimant, awarding CERCLA response costs, health
assessment costs, and/or natural resource damages associated with the
facility against any of the current owners or operators at the facility
to the surety directly. Additionally, the claimant would be required to
provide a signed statement from the claimant certifying that the
amounts sought had not been recovered or paid from any other source,
including, but not limited to, the owner or operator, insurance,
judgments, agreements, and other financial responsibility instruments.
    Upon receipt of these documents the surety would then make payment
in accordance with the instructions of the successful claimant. These
documentary payment requirements were selected as it removes EPA from
the claims administration process but ensures that a court has
determined that payment is due to the party making the claim under
CERCLA and that the party has not already recovered or been paid the
funds from another source. Further, by relying on objective documentary
submissions the Surety should be able to determine whether payment
should occur under the terms of the bond with only minimal due
diligence.
    Additionally, the bond would guarantee the owner or operator would
make payments or ensure payments were made as required in a CERCLA
settlement associated with the facility between any of the current
owners and operators at the facility and EPA or another authorized
Federal agency. The Administrator or the other Federal agency, in these
situations, would present a written signed statement to the surety
requesting payment from the surety on the grounds that payment had not
been made as required by a CERCLA settlement associated with the
facility and with any of the current owners or operators. Additionally,
the Administrator or the Federal agency would need to present a signed
statement certifying that the funds sought had not been recovered or
paid from any other source, including, but not limited to, the owner or
operator, insurance, judgments, agreements, and other financial
responsibility instruments.
    EPA believes that, similar to EPA's thinking on the documentary
payment conditions for the letter of credit issued in favor of any and
all third-party CERCLA claimants (discussed in section VI.C.1. of this
preamble), in the instances when the potential claimants are limited to
Federal government agencies a more streamlined payment condition is
optimal. EPA believes that the requirement of a signed statement from
the Administrator or another Federal agency is a clear documentary
condition and will require minimal due diligence on the part of
sureties.
    Finally, the bond would guarantee that the owner or operator
performs or ensures the performance of the work at the facility as
required by a CERCLA unilateral administrative order issued to any of
the current owners or operators by EPA or another Federal agency for
which the owner or operator has provided a written statement allowing
for the bond to assure performance of the work. Payments would be made
at the request of EPA or another Federal agency into a standby trust
established pursuant to the administrative order if the work was not
performed in accordance with the order.
    In this scenario, to make a claim against the surety bond the
Administrator or the other Federal agency would present a written
signed statement requesting payment from the surety into a trust fund
established pursuant to a CERCLA unilateral administrative order on the
grounds that performance at the facility had not occurred as required
by a CERCLA administrative order issued to a current owner or operator.
Additionally, the EPA Regional Administrator or the Federal agency
would need to present a signed statement certifying that the funds
sought had not been recovered or paid from any other source, including,
but not limited to, the owners or operators, insurance, judgments,
agreements, or other financial responsibility instruments.
    As discussed earlier, in the two payment scenarios limited to
Federal government claimants EPA is attempting to limit the complexity
of the documentary requirements. EPA believes the relatively simple
requirements of signed statements from EPA or another Federal agency
will streamline the claims process and reduce uncertainty on the part
of the surety as to whether or not payment should be made.
    EPA requests comment on the proposed documentary requirements for
payment from the surety bond. In particular, EPA is interested in
hearing if there are other documentary payment requirements that could
further limit the discretion required on the part of the surety and yet
still provide assurance against inappropriate claims being paid.
    EPA recognizes that the payment mechanics of the surety bond
involve multiple parties that will not be listed explicitly on the
surety bond. In discussions with representatives of the surety bond
industry, EPA learned that such a construction may likely be less
palatable to potential providers of surety bonds than a construction
with one designated claimant. Similarly, the Surety and Fidelity
Association of America (SFAA) recommended that EPA be the only claimant
on the bond. SFAA stated that multiple claimants enlarges the surety's
exposure to claims and possibly dilutes the protection to EPA as the
Agency may have less assurance of the proper use of the funds by third-
parties other than EPA. However, EPA is not proposing to list EPA as
the sole obligee on the bond for several reasons. First, non U.S.
Government claimants would need a final court judgment from a Federal
court awarding payment for CERCLA response costs, health assessment
costs, and/or natural resource damages ensuring that a court had
reviewed the merits of the claim (e.g. the consistency of the action
with the national contingency plan) and found the claim to be valid. As
a result, EPA does not share the concern that payment of funds to
parties other than EPA will compromise the protection of human health
and the environment. EPA

believes that, given the nature of CERCLA where any number of parties
may have claims under CERCLA Sec.  107, it is necessary to provide
payment from the bond to a range of third-party CERCLA claimants.
    EPA considered an option whereby EPA would be listed as the obligee
and administer the claims process however, as discussed in the letter
of credit Sec.  320.40 of the preamble. EPA is not proposing this
option for several reasons. First, EPA would not necessarily be
involved in all CERCLA actions at facilities and did not wish to
redirect its programmatic resources away from high priority sites to
administer the claims process for CERCLA Sec.  108(b). Moreover, EPA
may not be able to assess the merits of all CERCLA claims which include
natural resource damages and health assessments that are primarily the
responsibility of other entities. Finally, it may create a perception
of partiality were EPA to administer the claims process in scenarios
where the Agency was one of the claimants. EPA believes that the
proposed construction best achieves the need of providing payment to
the full range of potential CERCLA claimants while simultaneously
protecting against improper claims and preventing the sub-optimal
redirection of Superfund resources away from high-priority sites.
Surety Liability (Sec.  320.41(h))
    Under the terms of the bond, the surety would become liable on the
bond obligation when the owner or operator fails to perform as
guaranteed by the bond. EPA believes that this is an additional
advantage of the proposed instrument payment terms. In discussions with
representatives of the surety industry, representatives stressed to EPA
that the surety company should be secondary to the owners and operators
and claimants should first look to the owner or operators for
satisfaction. EPA hopes that this feature of the proposed CERCLA Sec.
108(b) surety bond's consistency with that aspect of surety practice
will encourage participation on the part of surety companies in the
CERCLA Sec.  108(b) program.
    The liability of the surety would be limited to the penal sum \68\
of the bond plus the amount of any investigation or legal defense fees
incurred by the surety. EPA, to the greatest extent possible, wishes to
preserve the value of the financial responsibility to pay CERCLA
claimants. EPA is thus proposing that any legal or investigation fees
incurred by the surety remain outside the penal sum of the bond and not
erode the value of the financial responsibility. A similar provision is
also being proposed for insurance and the corporate guarantee. EPA
requests comment on these proposed provisions.
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    \68\ The penal sum of a bond is the specified maximum amount
that the surety will be required to pay and is a required input in
the proposed surety bond language.
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Direct Action Language in the Surety Bond (Sec.  320.50(c))
    In addition to the payment triggers described earlier, the proposed
language of the CERCLA Sec.  108(b) surety bond would also include
language that the surety acknowledges that direct action suits may be
brought against the surety. The direct action provision would allow for
parties with CERCLA Sec.  107 or Sec.  111 claims, in certain instances
identified in CERCLA Sec.  108(c)(2), to take actions directly against
the surety. It is a cause of action authorized by the statute and EPA
expects it would operate independently of the three previously-
described payment scenarios. In these instances, as described in the
proposed bond language, the surety would have the rights and defenses
identified in CERCLA Sec.  108(c) and the liability protections in
CERCLA Sec.  108(d).
    Similar to the corporate guarantee, insurance and letter of credit
issued in favor of any and all third-party CERCLA claimants, EPA is
proposing that the required wording of the bond include a provision
that the surety notify EPA of any claims and payments made as a result
of a direct action. EPA believes this notification requirement is
valuable as the owner or operator may not be available to provide such
a notice of claims and payments in a direct action scenario yet EPA
wishes to remain informed of claims against the instrument and the
value of the financial responsibility.
    The SFAA also expressed concern that the direct action provision in
a CERCLA Sec.  108(b) surety bond may expose the sureties to too many
claims. Specifically, SFAA stated that a surety bond is a conditional
obligation under which the surety's obligation is triggered when the
principal defaults. SFAA stated that bankruptcy (one of the
preconditions for a direct action identified in CERCLA Sec.  108(c)) is
too broad as, in many cases, an owner or operator may still be able to
fulfill its responsibilities even though bankrupt. EPA agrees that the
owner or operator could still potentially fulfill its obligations even
though bankrupt. Claimants could still pursue the potentially
responsible party directly without implicating CERCLA Sec.  108(b)
instruments. EPA believes including the direct action provision is
important as in some cases it may not be possible for EPA, or another
third-party CERCLA claimant to obtain satisfaction from or obtain a
court judgment against the party liable under CERCLA Sec.  107 (or
other necessary documents to make a claim against the bond) and thus
recognizes the need for the surety, as guarantor, to stand in the
owner's or operator's shoes
Multiple Sureties (Sec. Sec.  320.41(e) and 320.50(c))
    The surety bond would be able to be issued by multiple sureties
provided that each is liable for its individual vertical percentage
share of the total penal sum of the bond. (Sec.  320.41(e)) EPA is
proposing surety bond language that would provide the option for owners
and operators to obtain surety bonds from multiple issuers in the
required amount of financial responsibility. EPA expects the required
amounts of CERCLA Sec.  108(b) financial responsibility may be
relatively large at some facilities and wishes to provide this
flexibility. The proposed arrangement for allowing multiple sureties to
cover a single facility is consistent with the approaches employed by
all of the financial responsibility programs EPA reviewed. All
financial responsibility programs reviewed, including the Coast Guard
CERCLA Sec.  108(a), RCRA Subtitle C liability coverage, RCRA Subtitle
C closure/post-closure, and RCRA Subtitle I Underground Storage Tanks,
require sureties to bind themselves jointly and severally for purposes
of allowing a joint action(s) against the issuers of the surety bond,
but allow for payment based on pre-determined proportions of the penal
sum (several liability).
    In the proposed CERCLA Sec.  108(b) surety bond language,
individual sureties would identify percentage limits of their liability
in the surety bond for which they would each be liable while these
individual surety limits would sum to the total penal sum of the bond.
EPA believes that such an arrangement may increase surety bond issuers'
capacity to collectively cover greater amounts of financial
responsibility because the surety's level of coverage would not be
impacted by the potential risk for non-payment by other sureties.
    When multiple sureties issue a single bond, the proposed
regulations would require that each surety be liable for their
individual vertical percentage share of the total penal sum of the
bond. EPA is proposing that the sureties' individual amounts of
liability be

specified in the bond as a percentage of the penal sum of the bond. The
proposed specification would create a vertical relationship whereby a
surety's liability is not affected by other co-sureties' abilities to
pay their shares. EPA believes this provides greater protection against
the insolvency of one of the participating sureties. This approach also
simplifies the claims process as the exhaustion of one surety's
liability does not need to be determined before payment can be received
from another surety. An additional advantage of this proposed structure
is that sureties would be binding themselves jointly and severally for
purposes of allowing a joint action(s) against the issuers of the
surety bond. This would allow for a simpler claims process for
claimants.
    An alternative EPA considered was proposing that multiple sureties
could form a tower of coverage comprised of horizontal layers. In such
an arrangement each surety in the horizontal tower would be agreeing to
cover its layer of the tower, not a percentage of the total. Those
sureties higher up the horizontal tower become responsible on a layer-
by-layer basis as the limits of each underlying surety's obligation
become exhausted. However, EPA is not proposing such an arrangement due
to several concerns with such an arrangement. First, a horizontal
arrangement presents the opportunity for sureties covering higher
coverage layers to avoid liability if a surety on a lower level becomes
insolvent and cannot cover the liability within its layer. This was a
concern also identified by the U.S. Coast Guard in development of its
CERCLA Sec.  108(a) regulations (see 59 FR 34220 (July 1, 1994)).
Secondly, such an option would raise the administrative burden on EPA
because EPA would need to ensure that each layer of coverage fits with
the layers above and below and EPA would also need to ensure that the
layers contained exhaustion provisions.
    EPA requests comment on the proposed arrangement for allowing
multiple sureties to execute one bond by identifying their vertical
percentage share of the penal sum. Specifically, EPA is interested in
other potential arrangements that may encourage surety participation in
the program and provide for relatively high amounts of financial
responsibility coverage yet not overly complicate implementation of the
claims process.
Written Statements From Attorneys General and Insurance Commissioners
(Sec.  320.41(d))
    EPA believes a bond written as required under this proposal may
implicate state insurance law and thus the validity of any such bond
may depend on state law. This issue has come up in other EPA
rulemakings including the financial responsibility requirements for
underground storage tanks containing petroleum (see, for example, 52 FR
12786, April 17, 1987) and the RCRA Subtitle C third party liability
requirements (see, for example, 53 FR 33941, September 1, 1988). State
insurance regulation and law is by and large the purview of the states
and thus the Agency does not believe it can state with certainty
whether any particular bond would subject the issuer to state insurance
law, and whether it would be valid with respect to such law. Similar to
the way the issue was handled in those programs, EPA is proposing that
a surety bond may be used to satisfy the requirements of this section
only if the Attorneys General or Insurance Commissioners of (i) the
state in which the surety is incorporated, and (ii) each state in which
a facility covered by the surety bond is located have submitted a
written statement to EPA that a surety bond executed as described in
the regulations is a legally valid and enforceable obligation in that
state. EPA believes that the surety bond would be an important
compliance option and welcomes comments from state Attorneys Generals
and Insurance Commissioners on this issue.
Termination of the Bond by the Owner or Operator (Sec. Sec.  320.41(l)
and 320.50(c))
    The owner or operator would be able to terminate the bond if the
Administrator has given prior written consent based on his receipt of
evidence of alternate financial responsibility as specified in Part 320
or if the Administrator releases the owner and operator from the
financial responsibility requirements of that part. To assist in
implementing this requirement the proposed wording of the surety bond
includes a provision governing the principal's (i.e. the owner's or
operator's) termination of the bond. The proposed bond language states
that the principal may terminate the bond by sending written notice to
the surety(ies), provided however, that no such notice shall become
effective until the surety(ies) receive(s) written authorization for
termination of the bond by the Administrator. In this way, the owner or
operator would not be able to unilaterally terminate the bond without
the authorization of EPA.

Performance Bond

    In meetings with potential providers EPA was told that sureties
typically prefer having an option of either performing or paying under
a bond. EPA considered providing such an option as the Agency believed
it may encourage greater participation from sureties in the CERCLA
Sec.  108(b) program as well as potentially allow sureties to conduct
work in certain cases, which may be more economical than EPA or another
Federal agency conducting the work itself. Specifically, EPA thought
that the option of performance could be advantageous in some
situations, for example, when the surety became liable because an owner
or operator either did not perform as required by a CERCLA unilateral
administrative order or failed to perform work as required by a CERCLA
settlement.
    However, EPA could not determine how to specify a workable
performance option into the CERCLA Sec.  108(b) surety bond in light of
some of the features of the rule's framework. Unlike typical
reclamation and closure programs, CERCLA Sec.  108(b) does not include
a series of defined and costed-out activities (e.g. closure) which the
surety guarantees will be completed. In such programs, if the principal
defaults and the surety elects to perform, the surety is typically
liable until the defined tasks are all completed. CERCLA Sec.  108(b)
does not include any pre-defined obligations. Rather, a CERCLA Sec.
108(b) financial responsibility instrument could be subject to multiple
claims by a variety of claimants under the various payment scenarios
over the life of the instrument. Therefore, a very accurate accounting
of the liability of the surety is necessary with respect to the claims
paid and the penal sum of the bond. Such accounting would be difficult
if claims were satisfied by performance as it is not clear how the
performance should be valued absent a pre-existing accounting of the
activities to be conducted. Therefore, surety performance would leave
questions about the remaining value of the bond which would create
uncertainty around future claims and the availability of financial
responsibility. Further, as CERCLA Sec.  108(b) financial
responsibility amounts may be relatively large, EPA anticipates that
multiple sureties may issue single bonds. This would create even
greater complexity around coordinating performance and determining the
remaining value of the bond. In light of these considerations, EPA is
today

proposing surety bond language that provides only for payment, not
performance. EPA requests comment on how EPA could specify a
performance option in the CERCLA Sec.  108(b) surety bond in light of
the considerations discussed.
3. Insurance (Sec.  320.42)
    An owner or operator would be able to satisfy the CERCLA Sec.
108(b) financial responsibility requirements by obtaining insurance for
CERCLA response costs, health assessment costs, and natural resource
damages which conforms to the requirements of the regulations. Through
the policy the insurer agrees to pay for the CERCLA response costs,
health assessment costs, and natural resource damages associated with
the facility of the current owners and operators under certain
circumstances should the current owners or operators fail to do so.
Each insurance policy would be required to be amended by the attachment
of a CERCLA Sec.  108(b) insurance endorsement as worded in Sec.
320.50(d).
Issuer Eligibility (Sec.  320.42(b))
    At a minimum, the insurer would be required to 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. These
proposed minimum criteria for an insurer providing insurance under the
regulations are the same as those used under the RCRA Subtitle C
financial assurance program, which EPA believes have worked well.
Additionally, these requirements would be familiar to the regulated
community and implementing EPA staff. EPA believes that such standards
help assure the integrity of the insurers whose policies are being used
by owners or operators to meet the financial responsibility
requirements. EPA believes these qualifications will assure that
insurers are subject to some regulatory oversight by state insurance
departments but will still permit broad participation in providing the
insurance. EPA considered alternative qualifications for providers of
insurance but is proposing that providers of insurance policies meet
the requirements described in this section. In making this decision EPA
attempted to balance the benefit of potentially lower default rates by
insurers providing insurance under the proposed regulations on the one
hand, and the potential impact on the supply of instruments and the
administrative burden on the Agency entailed in verifying providers met
additional qualifications of these alternatives on the other. For more
information on alternatives considered, please see the background
document that addresses instrument provider qualifications.
    EPA also requests comment on allowing owners and operators to
obtain insurance policies from captive insurers and/or risk retention
groups. A captive insurer is an insurance company that provides
insurance primarily or exclusively to its owner(s). A pure captive is
defined as having only one owner and providing insurance coverage to
only one corporate entity, whereas a group captive is defined as having
more than one owner and providing insurance coverage only to members of
the group. A risk retention group (RRG) is a liability insurance
company owned by its members (policy holders) and organized under the
Federal Liability Risk Retention Act.
    EPA is aware that some observers have noted concerns with such
forms of insurance suggesting that captive insurance and risk retention
groups may present a higher level of risk than commercial insurance.
EPA is particularly concerned about the risk that captive insurers may
present. Specifically, the EPA Inspector General in its 2001 and 2005
reports on the RCRA financial assurance program has pointed to the
limited financial independence between the insurer and the owner or
operator as one source of risk. The OIG, in the 2005 report, explained
that the financial health of the captive insurer is tied to the parent
company. Most captive insurance companies are wholly owned
subsidiaries, so there is a lack of independence between the captive
and the parent company. If the parent company has financial
difficulties, then the captive insurer may not have the funds to cover
the assured costs. (see Office of Inspector General, Audit Report: RCRA
Financial Assurance for Closure and Post-Closure, Report No. 2001-P-007
March 30, 2001; and Office of the Inspector General, Continued EPA
Leadership Will Support State Needs for Information and Guidance on
RCRA Financial Assurance, Report No. 2005-P-00026, September 26, 2005).
EPA has concerns that pure captive insurers in particular may offer
insufficient assurance in the context of CERCLA Sec.  108(b) financial
responsibility. Pure captive insurance has a limited ability to fulfill
a basic purpose of insurance: To spread the risks of potential losses
among multiple parties. In their 2007 report on captive insurance the
Environmental Financial Advisory Board (EFAB) noted that the greatest
risk to the solvency of a captive insurer is an infrequent, large
insurance claim. (See Environmental Financial Advisory Board. The Use
of Captive Insurance as a Financial Assurance Tool in Office of Solid
Waste and Emergency Response Programs. March 2007.) This may be the
very nature of claims for CERCLA response costs, health assessment
costs, and natural resource damages associated with hardrock mining
facilities, which can be quite large and difficult to predict with
certainty, for which the 108(b) financial responsibility instruments
would be intended to pay.
    EPA believes that risk retention groups may also carry potentially
higher risk than commercial insurance but may be better suited to
provide insurance under CERCLA 108(b) than pure captive insurers due to
their greater ability to spread risk across multiple insureds. Risk
retention groups were the subject of a 2005 GAO report that identified
some concerns with risk retention groups. One of the primary concerns
identified by the GAO was the `patchwork' nature of state regulation
and oversight of risk retention groups. (See Government Accountability
Office, Risk Retention Groups: Common Regulatory Standards and Greater
Member Protections Are Needed, GAO-05-536. August 2005.) Such a
patchwork regime of state regulation and oversight may allow some risk
retention groups to operate with limited oversight, including solvency
regulation.
    EPA also recognizes that allowing insurance policies written by
captive insurers and risks retention groups may add potential insurance
capacity. EPA believes insurance is an important financial
responsibility instrument under CERCLA Sec.  108(b). EPA also
understands from its discussions with representatives of the commercial
insurance industry as it developed this proposal that environmental
insurance policies commonly issued may be narrower in scope than the
proposed CERCLA Sec.  108(b) requirements. The Agency was also told
that the scope of the insurance coverage the Agency is proposing to
require today would likely be viewed as a hybrid between a closure and
risk transfer policy.\69\ EPA recognizes that a market for this type of
hybrid coverage thus may not currently exist and may need some time to
fully develop. EPA believes one benefit of allowing owners and
operators to purchase policies written by captive insurers and risk
retention groups may be, at least initially, a deeper market for

insurance policies to meet the CERCLA Sec.  108(b) regulations. EPA's
expectations in this respect are strongest for risk retention groups,
and are informed by the 2005 GAO report, which noted that many
insurance regulators have commented that risk retention groups have
filled voids where commercial insurers may not have had a strong
interest. The report identified medical malpractice insurance as an
area where risk retention groups were able to provide coverage where
the availability of affordable commercial insurance was limited.
Furthermore, EPA's evaluation of markets for financial responsibility
instruments suggested that risk retention groups may present an
opportunity for creation of additional capacity to serve the financial
service needs of the hardrock mining industry. Specifically, the report
stated RRGs have been able to offer additional capacity to the
insurance markets to cover volatile, capital-intensive risks like those
associated with hardrock mining.
---------------------------------------------------------------------------

    \69\ A closure policy would assure the performance or
satisfaction of certain known or foreseeable obligations. A risk
transfer policy, on the other hand, addresses losses arising from
fortuitous events (e.g. releases) that may or may not occur.
---------------------------------------------------------------------------

    In light of these tradeoffs between potentially higher risk to
third-party claimants and taxpayers presented by captive insurers and
risk retention groups and the possible additional capacity they may
provide, EPA requests comment on allowing policies written by these
types of insurers. Specifically, EPA requests comments on allowing
policies issued by captives or risk retention groups provided the
issuer had a minimum financial strength rating from A.M. Best or a
comparable rating from another Nationally Recognized Statistical
Ratings Organization (NRSRO). EPA believes requiring, at a minimum,
that captives and risk retention groups have a minimum financial
strength rating may address some of the concerns associated with these
types of policies. First, recognizing the limited financial
independence between the owner or operator and the insurer and that
captive insurance in particular has some similarities to self-
insurance, a financial strength rating would help to demonstrate that
the insurer has the financial wherewithal to pay claims on behalf of
the owner or operator. Secondly, the financial strength rating provides
an independent and common assessment of the financial strength of the
insurer and thus may alleviate the concerns of the state-by-state
variation in oversight and solvency examination the GAO noted with
respect to risk retention groups. Such a provision would also be
consistent with one of the findings in the 2007 EFAB report that the
use of independent credit analysis (i.e., credit ratings) is a cost-
effective mechanism for demonstrating the financial strength of a
captive insurer and that these ratings help address the limited
capacity of state regulatory bodies to undertake extensive credit
analysis.
    The value of a potential rating requirement for a captive insurer
or risk retention group can also be illustrated by lower historical
default rates for higher rated insurers. In 2015 AM Best reported \70\
that US life/health and property/casualty insurers rated by AM Best
over the period 1977-2014 with secure ratings had a cumulative three-
year impairment rate of 1.05 percent. The same impairment rate for
life/health and property/casualty insurers rated by AM Best with
vulnerable ratings over that time period was 10.45 percent suggesting
that ratings requirement could meaningfully reduce the impairment risk
of a risk retention group or captive insurer.
---------------------------------------------------------------------------

    \70\ A.M. Best. Best's Impairment Rate and Rating Transition
Study-1977-2014. U.S. Property/Casualty & Life/Health. Exhibit 2. Pg
5. (August 21, 2015)
---------------------------------------------------------------------------

    EFAB also recommended to EPA in its 2007 report on captive
insurance that in addition to the captive insurer having a minimum
rating, the financially responsible affiliate (e.g. the owner or
operator demonstrating financial responsibility with insurance from a
captive) should also hold a minimum credit rating. EPA requests
comments on this additional potential requirement for captive insurance
should captive insurance be allowed in the final rule. EPA believes
that such a requirement would address some of the concern associated
with the similarities between pure captive insurance and a financial
test but would increase the administrative burden on the Agency.
    EPA recognizes, however, that a requirement for a financial
strength rating would not address all concerns with these instruments.
These remaining concerns would include: (1) A concern that state
insurance regulation of captives and risk retention groups may not be
as uniform as that for commercial insurance and may be limited to only
the state in which the insurer is chartered; \71\ (2) a concern that
captives and risk retention groups may not be able to spread risk
across many insureds given the limitations inherent in for whom they
can write policies. EPA is therefore seeking comment on these issues,
and on suggested approaches to address these remaining concerns.
---------------------------------------------------------------------------

    \71\ This concern is one of the concerns identified in the 2005
GAO report but may not be unique to captive or risk retention groups
in the context of environmental insurance. Similar to captive
insurers and risk retention groups, an excess or surplus lines
insurer must be licensed in the state that serves as its domicile
and must meet the solvency requirements of that state alone. Excess
or surplus lines insurers cover difficult to standardize risks which
often includes environmental insurance and, the Agency anticipates,
may include CERCLA 108(b) coverage initially due to the relatively
high dollar limits of liability and high risk facility classes.
---------------------------------------------------------------------------

    For example, EPA requests comment on the concept of allowing
policies issued by risk retention groups or group captives that met a
certain minimum rating, but not allowing pure captive insurers to meet
the CERCLA Sec.  108(b) financial responsibility requirements. The
rationale for such a distinction would be that risk retention groups
and group captives may be able to spread risk across a larger pool of
financially and legally independent policy holders than a pure captive
insurer that may be restricted to spreading risk amongst its own
financially-related affiliates. As such, accepting insurance policies
from risk retention groups or group captives, but not pure captives,
may address the second concern identified. EPA also requests comment on
whether insurance policies provided by risk retention groups and group
captive insurers more generally should be treated equivalently.
    EPA recognizes that a financial strength rating would not
necessarily be available in the near term as some captive insurers or
risk retention groups, were they to ultimately be considered acceptable
issuers, may be newly created in response to these regulations. EPA is
thus accepting comment on whether, if EPA ultimately allows policies
written by captives and/or risk retention groups, to phase in the
ratings requirement. A phased ratings requirement could operate by
requiring that owners and operators provide evidence of the requisite
financial strength of a captive insurer or risk retention group
beginning five years after the effective date of the rule. In this way,
a rating agency would be able to review a multi-year track record of
the insurer's performance which may be necessary in order to accurately
rate the insurer.
Submission of Endorsement (Sec.  320.42(c))
    Typically, financial responsibility regulations require submission
of either a certificate of insurance or an endorsement as evidence of
the required insurance coverage. A certificate of insurance is a form
that typically is completed by an insurance broker or agent at the
request of an insurance

policyholder, which evidences the fact that an insurance policy has
been written. An endorsement to an insurance policy is a valid and
binding part of the contract considered to be part of the insurance
contract. EPA is today proposing that an endorsement be submitted as
evidence of financial responsibility by owners and operator that choose
to obtain insurance coverage as the means of complying with the CERCLA
Sec.  108(b) insurance requirements. Specifically, the owner or
operator would be required to submit a signed duplicate original of the
CERCLA Sec.  108(b) financial responsibility endorsement to the
Administrator, or to regional delegees of the Administrator, if
applicable, if the endorsement covers facilities located in multiple
regions. For more information on the required wording of the
endorsement and alternatives considered please see the discussions
later in this preamble, and the background document ``Potential
Requirements for Insurance, Surety Bonds, Letters of Credit and Trust
Agreements and Standby Trust Agreements under CERCLA Sec.  108(b)''
regarding instrument specifications.
    In discussions with representatives of the insurance industry, EPA
was told by the participating representatives that they were
indifferent between a certificate of insurance and an endorsement as
the form of the evidence of financial responsibility. EPA did not want
to require the whole policy be submitted in all cases and is thus today
proposing that an endorsement be submitted as evidence of financial
responsibility. Other financial responsibility programs specify either
certificates, endorsement or both. In order to reduce the complexity of
the proposed regulations and provide a narrower range of documents EPA
would need to review during implementation, the Agency is proposing an
endorsement be submitted. Further, because an endorsement is part of
the insurance contract itself, it may provide greater certainty with
respect to the insurance coverage provided by the policy than a
certificate of insurance.
Requirements To Ensure Continuity of Financial Responsibility Coverage
(Sec. Sec.  320.42(f)(k) and (l))
    An owner or operator using insurance to satisfy the requirements of
this section would also be required to establish a standby trust and
update Schedule A of the trust agreement within sixty days of a change
in the amount of CERCLA Sec.  108(b) financial responsibility. Similar
to the requirements for the letter of credit and surety bond, the
standby trust is being required alongside the insurance instrument to
ensure continued coverage, in conjunction with the automatic renewal
provision of the policy and the potential liability of the insurer if
the owner or operator does not obtain replacement financial
responsibility. EPA's concern is that an insurance policy might be
cancelled, not renewed or otherwise terminated leaving no financial
responsibility in place for the payment of valid third-party CERCLA
claims. EPA is especially concerned that policies may be cancelled,
terminated or otherwise not renewed following the issuance of a notice
letter of potential liability for the release of hazardous substances
or marked financial decline of the owner or operator, and financial
responsibility may not be in place when a claim is made. Amplifying
these concerns is the recognition that the CERCLA processes leading to
a claim (e.g. cost recovery) may be lengthy, which may make it
particularly difficult to ensure continuity of CERCLA Sec.  108(b)
insurance coverage without these requirements.
    As a result, in addition to the requirement to establish a standby
trust, EPA is proposing an automatic renewal provision. Specifically,
EPA is proposing that the endorsement provide that cancellation,
failure to renew, or any other termination of the insurance by the
insurer will be effective only upon written notice to the owner and
operator and the Administrator by certified mail and only after the
expiration of 120 days beginning with the date of receipt of the notice
by both the Administrator and the owner or operator, as evidenced by
the return receipts. Such an automatic renewal provision in the policy
would be required to provide the insured with the option of renewal at
the face amount of the expiring policy. In this way, insurance coverage
could only lapse after 120 days' notice providing the owner and
operator an opportunity to obtain replacement financial responsibility.
    The cancellation and termination language in the endorsement
proposed today was intended to closely follow the language used in the
RCRA Subtitle I insurance endorsement for underground storage tank
financial responsibility. A 2004 court decision held that those
regulations preclude rescission as a remedy for misrepresentation and
provide only for prospective cancellation of the insurance.\72\ EPA is
concerned that at the time a claim was made against a CERCLA Sec.
108(b) insurance policy, rescission (retrospective cancellation) of the
policy due to misrepresentation of the insured, would result in the
financial responsibility being unavailable and leave valid claims
unsatisfied. EPA recognizes the public policy merits of protections to
insurers in the event of misrepresentation. However, in the CERCLA
Sec.  108(b) context, EPA would not have access to the owner or
operator's application for insurance and any investigations into
misrepresentations or omissions would potentially be burdensome to the
Agency and redirect resources away from cleanups and other programmatic
priorities. EPA believes that the insurer is in the best position to
conduct investigations as to the accuracy of the information provided
in the application for insurance and thus should retain the risk from
misrepresentation rather than any CERCLA claimants. EPA's intent today
is to preclude rescission of the insurance coverage as a remedy for
misrepresentation and instead provide that prospective cancellation,
non-renewal or other termination of the insurance are the sole
remedies. EPA requests comment on this proposed provision and
endorsement language.
---------------------------------------------------------------------------

    \72\ See: Zurich Am. Ins. Co. v. Whittier Props., Inc., 356 F.3d
1132 (9th Cir. 2004).
---------------------------------------------------------------------------

    Finally, the endorsement would be required to specify that in
instances where the owner or operator fails to obtain alternate
financial responsibility and obtain written approval of such alternate
financial responsibility from the Administrator within ninety days
after receipt by both the owner or operator and the Administrator of a
notice from the insurer that it has decided to cancel, not renew or
otherwise terminate the insurance policy, the insurer would be liable
up to the face value of the policy for payment into the standby trust
in accordance with the terms of the endorsement. EPA believes the
combination of the requirements for a standby trust, a notice of
cancellation, failure to renew or other termination of the policy and
the insurers potential liability if the owner or operator did not
obtain alternate financial responsibility would provide assurance to
EPA and other claimants that funds will be available to make payment
for CERCLA response costs, health assessment costs, and natural
resource damages as required under the proposal. This requirement would
be similar to those for owners and operators using letters of credit or
surety bonds. This arrangement, and the similar provisions for other
proposed instruments, as well as alternatives are

discussed in more depth in the preamble section headed `issuer
cancellation provisions.'
    A notable feature of the issuer cancellation provision proposed
today for insurance is how failure to pay the premium would be treated.
Under this proposed rule, if failure to pay the premium was the
rationale for the insurer's decision to cancel, not renew, or otherwise
terminate the policy, the insurer would be liable on the policy to fund
a standby trust if the owner or operator failed to obtain alternate
financial responsibility and obtain written approval of such alternate
financial responsibility from the Administrator within ninety days
after receipt by both the owner or operator and the Administrator of
the notice of the insurers intent to cancel, not renew, or otherwise
terminate the policy. EPA believes that this is the appropriate
treatment of the insured's failure to pay the premium. EPA believes
that the instances in which the owner or operator is unable to pay the
premium are likely instances where financial responsibility coverage is
most needed as the owner's or operator's ability to satisfy valid
third-party CERCLA claims is likely limited. EPA believes one of the
benefits of CERCLA Sec.  108(b) is that the credit risk of the owners
and operators of facilities managing hazardous substances can be
transferred from the taxpayer and other third-party CERCLA claimants to
the insurance and financial responsibility providers better able to
manage, assess and make arrangements for such credit risks.
    One alternative option would be to allow cancellation in the event
of the insured's failure to pay the premium, without potential insurer
liability. While, for the reasons discussed earlier, EPA is not
proposing such an arrangement, the Agency requests comments on this
alternative and the proposed treatment of failure to pay the premium on
the part of the insured.
Payment for Third-Party CERCLA Claims From the Insurance (Sec. Sec.
320.42(h) Through (j) and (l) and Sec.  320.50(d))
    Under the proposed regulations the insurance would provide for
payment to third-party CERCLA claims with three payment triggers in
addition to providing for direct action as provided by CERCLA. EPA
anticipates these four payment scenarios would operate independently of
each other. These payment scenarios are the same as for the other
instruments and are discussed more fully in section VI.B.5. of this
preamble.
    The policy would be required to provide for the payment awarded in
final court judgments from a Federal court against any of the current
owners and operators awarding CERCLA response costs, health assessment
costs, and/or natural resource damages associated with the facility to
the party obtaining the judgment should such payment not be made within
thirty days.
    The policy would be required to provide for payment as required by
a CERCLA settlement associated with the facility between any of the
current owners or operators at the facility and EPA or another Federal
government agency should the payment as required by the settlement not
be made.
    The policy would also be required to provide for payment into a
trust fund established pursuant to a CERCLA unilateral administrative
order issued to any of the current owners or operators at the facility
by EPA or another Federal agency in instances where performance at the
facility as required by the order does not occur. The owner or operator
must have provided a written statement allowing the insurance policy be
used to assure performance of the work required in the order.
    In addition to the three proposed payment scenarios identified for
which EPA intends to provide insurance coverage, the proposed CERCLA
Sec.  108(b) insurance would also be required to provide for direct
action against the insurer in instances identified in CERCLA Sec.
108(c)(2). Specifically, the proposed required wording of the CERCLA
Sec.  108(b) insurance endorsement includes language stating that in
the case of a release or threatened release of (a) hazardous
substance(s) from a facility covered by the policy, the insurer
acknowledges that any claim authorized by CERCLA Sec. Sec.  107 or 111
may be asserted directly against the insurer as provided by CERCLA
Sec.  108(c)(2). The endorsement would also state that the insurer
consents to suit with respect to these claims subject to the
limitations in CERCLA Sec.  108(d), and that the insurer will be
entitled to all rights and defenses provided to guarantors by CERCLA
Sec.  108(c). Further, under the proposed terms of the endorsement the
insurer would provide notice of any such resulting claims and payments
to the Administrator. EPA believes this notification requirement is
valuable as the owner and operator may not be available to provide such
a notice of payments or claims in a direct action scenario yet EPA
wishes to remain informed of claims against the instrument and the
value of the financial responsibility.
General Performance Clause (Sec.  320.50(d))
    The proposed insurance endorsement language includes a general or
blanket performance clause as a means to address the myriad number of
ways the scope of insurance coverage provided by an insurance policy
may be limited. EPA recognizes that the ability to tailor insurance
coverage to the specific needs of the insured is one of the virtues of
insurance contracts; however, the Agency believes that in the context
of statutorily required financial responsibility such limiting
provisions of the policy may conflict with the intended scope of the
financial responsibility coverage and may frustrate the realization of
the public policy goals. Environmental insurance policies can be long,
complex contracts that operate as a whole to define and restrict the
coverage provided.
    EPA believes it is necessary to propose a performance clause in the
language of the endorsement that would amend any terms of the policy
inconsistent with the regulatory requirements for CERCLA Sec.  108(b)
insurance or the terms specified in the endorsement. Similar
performance clauses are employed in the certificate of insurance
required as evidence of financial assurance for closure and post-
closure care of hazardous waste facilities in the RCRA Subtitle C
program (see 40 CFR 264.151(e)) and in the required wording of the
endorsement used in the RCRA Subtitle C third-party liability program
(see 40 CFR 264.151(i)). EPA believes that the proposed performance
clause in the endorsement will provide EPA evidence of financial
responsibility submitted by owners and operators electing to use
insurance without necessitating EPA review of the entire insurance
policy. Without such a provision, the administrative burden involved
with reviewing insurance submissions would be significantly higher and
may require expertise not readily available within EPA.
    The proposed performance clause states that the insurance afforded
with respect to the covered facilities is subject to all of the terms
and conditions of the policy; provided, however, that any provision,
exclusion, definition, condition, retroactive date, clause, defense, or
other term of the policy inconsistent with 40 CFR 320.42 or certain
identified required specifications in the endorsement are hereby
amended to conform with 40 CFR 320.42 and the required specifications
in the endorsement. EPA intends for the performance clause to

help ensure that financial responsibility coverage will continue and
that the insurer will satisfy valid third-party CERCLA claims as
intended by the proposed regulations. In light of the fact that
insurance policies are often long, complex documents that may include
numerous exclusions, definitions, conditions, or other terms that may
undercut the intended coverage, EPA requests comment on the proposed
performance clause in the CERCLA Sec.  108(b) insurance endorsement.
Furthermore, EPA is interested in comments as to whether or not the
proposed insurance specifications, including the performance clause,
will reliably provide for the intended coverage (e.g. payment under the
scenarios described in IV B 5 ``General Provisions for Instrument
Payment'' of the preamble).
Retroactive Dates (Sec.  320.50(d))
    The most notable aspect of the proposed performance clause may be
the specification that any retroactive date \73\ contained in the
policy inconsistent with the intended scope of CERCLA Sec.  108(b)
financial responsibility coverage is amended to conform with the
regulatory specifications and the terms of the endorsement. EPA
believes that such a specification is necessary to effectuate the
purpose of CERCLA Sec.  108(b) and has public policy merits. CERCLA
Sec.  108(c)(2) provides a cause of action against insurers providing
CERCLA Sec.  108(b) coverage in certain instances for any claim
authorized by CERCLA Sec. Sec.  107 or 111. CERCLA's liability scheme
is established in CERCLA Sec.  107 and is retroactive and includes
costs incurred addressing the threat of a release. EPA believes a
retroactive date would be inconsistent with the intended scope of
CERCLA Sec.  108(b) financial responsibility which is intended to cover
the full suite of potential CERCLA liabilities including threatened
releases, which could be a significant driver of costs and risk and may
exist at many facilities subject to CERCLA Sec.  108(b) financial
responsibility requirements.
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    \73\ The ``retroactive date'' or ``continuity date''
(terminology varies) establishes the foregoing temporal limits of
insurance policies: Pollution conditions commencing before the
specified date are not covered, even if a claim about such a
pollution condition is first made during the policy term.
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    This issue relates to the concept of CERCLA Sec.  108(b) presenting
a hybrid risk from the viewpoint of insurers mentioned earlier. In
discussions with representatives of the insurance community, EPA was
informed that the scope of a CERCLA response cost is broad and has
elements suited to risk transfer policies that commonly have
retroactive dates (e.g. costs incurred responding to fortuitous
releases) and closure insurance that typically would not have a
retroactive date (e.g. costs incurred responding to the threat of
release). EPA recognizes that for this reason, the CERCLA Sec.  108(b)
financial responsibility scope of coverage may, at least initially, be
perceived as an unfamiliar or hybrid risk by insurers yet believes that
allowing retroactive dates inconsistent with intended scope of coverage
could result in many valid third-party CERCLA claims being unsatisfied
on the basis that the pollution condition pre-dated the retroactive
date of the policy. EPA requests comment on the performance clause and
in particular the proposed language amending any retroactive dates
inconsistent with the scope of coverage prescribed by the regulations.
    One possible arrangement that representatives from the insurance
community offered was to separate the financial responsibility
requirements into two separate obligations. Such an arrangement for
CERCLA Sec.  108(b) would allow EPA to specify an appropriate
retroactive date for the fortuitous risks and not have one for the more
``known'' CERCLA response and health assessment costs. In the RCRA
Subtitle C financial assurance program EPA was able to specify separate
instruments for known costs (e.g. closure) and third-party liability
financial assurance which is more fortuitous in nature. However, such a
construct is not possible in the case of CERCLA Sec.  108(b) financial
responsibility. Because CERCLA Sec.  108(b) financial responsibility
does not support a permitting program EPA cannot establish, by
regulation, performance requirements for owners and operators subject
to the rule (e.g. closure requirements that might address a threat of
release) which would be the basis for a separate amount of financial
responsibility. Further it is important to recognize that the
determination of a CERCLA Sec.  108(b) financial responsibility amount
does not constitute a determination of CERCLA liability for regulated
entities or establish any presumptive remedy which could be the basis
of an amount for costs amenable to a closure policy. This is one of the
reasons why CERCLA Sec.  108(b) financial responsibility is inherently
different from financial responsibility that complements reclamation
and closure programs. Given the uncertainty around what Superfund
actions may ultimately be required at a facility, EPA believes it
unwise to establish different pots of money. Such an approach would
only be optimal in instances where there is established certainty that
particular actions will need to take place at a facility (e.g. in a
program with regulatory requirements for closure or post-closure).
Multiple Insurers (320.42(d))
    EPA is proposing that up to four insurers would be able to provide
the required amount of CERCLA Sec.  108(b) financial responsibility at
a single facility. EPA expects the required amounts of CERCLA Sec.
108(b) financial responsibility may be relatively large and wishes to
provide this flexibility. The proposed endorsement language would
require that the participating insurers identify their percentage share
of the coverage at facilities covered by the policy and the
corresponding dollar value of that percentage share.
    The proposed arrangement for allowing multiple insurers to cover a
single facility is consistent with the proposed arrangement for
multiple sureties with a few exceptions. As described in the surety
bond section of the preamble, the proposed language of the surety bond
requires sureties to bind themselves jointly and severally for purposes
of allowing a joint action(s) against the issuers of the surety bond,
but allow for payment based on pre-determined proportions of the penal
sum (several liability). Unlike in the case of surety bonds where such
a provision has a great deal of precedent, such a provision for
insurers participating in vertical towers of coverage is less common in
the financial assurance programs EPA reviewed. As a result, EPA is
proposing that participation by multiple insurers be limited to four
insurers to ensure a manageable claims process. The U.S. Coast Guard
included the same cap on the number of participating insurers (59 FR
34220 (July 1, 1994)). EPA does not want to create a scenario whereby
claimants need to take action against many insurers which would
complicate the claims process and create a protracted process for the
satisfaction of valid claims. EPA requests comment on this limitation.
Specifically, EPA is interested in comments as to whether, in instances
where multiple insurers provide coverage at a single facility,
requiring participating insurers to bind themselves jointly and
severally for the purposes of allowing a joint action(s) against the
group of insurers would be possible and how such a provision might best
be specified.
    When multiple insurers do provide coverage at a single facility,
the

proposed regulations would require that each insurer be liable for
their individual vertical percentage share of the total CERCLA Sec.
108(b) financial responsibility amount. The proposed specification
would create a vertical relationship whereby an insurer's liability is
not affected by the other insurers' abilities to pay their shares. EPA
believes this provides greater protection against the insolvency of one
of the participating insurers. The U.S. Coast Guard also restricted
multiple insurers to only providing vertical towers of coverage.\74\
This approach also simplifies the claims process as the exhaustion of
one insurer's liability does not need to be determined before payment
can be received from another insurer.
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    \74\ See 33 CFR 138.80(c)(1)(i).
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    An alternative EPA considered was proposing that multiple insurers
could form a tower of coverage comprised of horizontal layers. In such
an arrangement each insurer in the horizontal tower would be agreeing
to cover its layer of the tower, not a percentage of the total. Those
insurers higher up the horizontal tower become responsible on a layer-
by-layer basis as the limits of each underlying policy become
exhausted. However, EPA is not proposing such an arrangement due to
several concerns. First, a horizontal arrangement presents the
opportunity for insurers covering higher coverage layers to avoid
liability if an insurer on a lower level becomes insolvent and cannot
cover the liability within its layer. This is a concern also identified
by the U.S. Coast Guard when it developed its CERCLA Sec.  108(a)
regulations.\75\ Secondly, such an option would raise the
administrative burden on EPA because the Agency would need to ensure
that each layer of coverage fits with the layers above and below by
ensuring the insurance included the necessary ``follow form''
provisions.\76\ Further, EPA would also need to ensure that the layers
contained ``drop down'' provisions to address exhaustion issues that
might arise as a result of insolvency of an underlying insurer.\77\
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    \75\ See 59 FR 34220 (July 1, 1994).
    \76\ A ``follow form'' provision means that the excess insurer
agrees to abide by the terms of the primary or underlying
policy(ies) to the extent that the excess policy does not contain a
conflicting parallel term. The intent of an EPA requirement for such
a provision would be to eliminate coverage gaps that may arise when
excess policies do not ``follow form'' of underlying policies. For
example, a gap may arise when the primary policy covers gradual
pollution but the excess policy does not.
    \77\ An exhaustion provision states that an excess layer of
coverage cannot be triggered until all primary and underlying layers
have been exhausted. Problems in accessing excess layers can arise
when either the insured or an underlying insurer cannot pay due to
insolvency. A ``drop down'' specification can address the situation
of insolvency on the part of an underlying insurer, although other
terms and conditions in the excess policy will affect whether the
coverage will drop down.
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    EPA requests comment on the proposed regulatory provision allowing
up to four insurers to provide coverage at one facility by identifying
their vertical percentage share of the total CERCLA Sec.  108(b)
financial responsibility amount in the submitted endorsement.
Specifically, EPA is interested in other potential arrangements that
may encourage insurer participation in the program and provide for
relatively high amounts of financial responsibility coverage yet not
overly complicate implementation or the claims process.
Termination of Insurance Coverage by the Owner or Operator (Sec.
320.42(n) and (p))
    The owner or operator would be required to maintain the insurance
in full force and effect until the Administrator consents to
termination of the insurance by the owner or operator. The
Administrator would give written consent to the owner or operator that
he or she may terminate the endorsement when: (1) An owner or operator
substitutes alternate financial responsibility as specified in this
section; or (2) the Administrator releases the owner or operator from
the requirements of this section in accordance with Sec.  320. 26. This
provision is intended to ensure that the coverage of the financial
responsibility does not cease, and that funds remain available when
needed, until the release provisions are met or alternate financial
responsibility is provided.
4. Financial Test (Sec.  320.43)
a. Overview and Introduction
    CERCLA Sec.  108(b) (2) provides that financial responsibility may
be established by any one, or any combination of, the instruments
listed in that paragraph, including ``qualification for self-
insurance.'' A financial test is a financial responsibility instrument
that allows an owner or operator to qualify for self-insurance by
demonstrating that it has sufficient financial strength to meet its
environmental obligations. When allowing the use of a financial test,
the Government accepts the facility's demonstration of financial
strength as the only assurance that the owner or operator will meet its
environmental obligations, and does not require that it establish a
trust fund or obtain additional security in the form of a third-party
financial instrument, such as insurance, a surety bond, or letter of
credit.
    The Agency is co-proposing two separate regulatory approaches in
the form of options regarding the use of a financial test to assure
that this important issue is thoroughly considered before the Agency
makes a decision in the final rule. The Agency is proposing, under
Option 1, not to allow the use of a financial test or corporate
guarantee, and is proposing under Option 2 allowing the use of a credit
rating-based financial test and corporate guarantee. At this time, EPA
prefers Option 1. However, the Agency is proposing both options to
fully evaluate this issue, and to gather as much information as
possible to inform its ultimate decision on whether the financial test
and corporate guarantee mechanisms are appropriate for use by hardrock
mining facilities under CERCLA Sec.  108(b). EPA has identified, and
presented in this preamble discussion, a number of factors that the
Agency will consider in making its final decision, and seeks public
comment on these factors, as well as additional information from the
public that could inform the Agency's final decision.
    By replacing the requirement to obtain a third-party instrument
with a demonstration of financial strength, the financial test results
in significant cost savings to eligible owners or operators, from not
having to purchase a third-party financial responsibility instrument.
However, by allowing a financial test, EPA would accept the risk that,
if the company's financial situation deteriorates and it cannot obtain
a third-party instrument or fund a trust fund to meet its environmental
obligations, the costs of addressing the environmental risk at the
facility could fall to the public. With the added layer of a third-
party financial responsibility instrument, however, the risk of default
to the public would be lessened by the financial strength of the
instrument provider. Nonetheless, EPA recognizes that the risk of
default exists regardless of the type of financial responsibility
instrument. For example, even in the case of secured financial
responsibility instruments, the possibility remains that the banks and
insurance companies underwriting these instruments could also fail.
Regardless of the scenario, with or without a financial test, EPA and
the public are not without some risk of having to cover such
obligations.
    EPA also is carefully considering the elements of the financial
test. Financial tests can vary in approach and in sensitivity. The
combination of terms

and conditions impacts the balance of cost savings to the regulated
community and the risk to the public, as well as a test's efficacy.
Thus for example, bond ratings and financial ratios are commonly used
measures of financial strength in financial tests. For bond-rating-
based tests, establishing a lower minimum rating(s) requirement for
self-insurance, can expand the availability of the test to the
regulated community. At the same time, such entities with lower credit
ratings also possess a higher likelihood of defaulting on their
obligations. Thereby, permitting less credit worthy companies the
ability to use the financial test increases the chance that an
obligation may go unpaid and be borne by the public.
    Further, the financial strength of an owner or operator as measured
by a financial test represents a snapshot in time. Thus, for a
financial test to be effective, the owner or operator must provide
periodic evidence that it continues to pass the financial test and that
it can meet the costs associated with its facility over time. For a
financial test to be effective: (1) The financial test must accurately
reflect the financial strength of the owner or operator; (2) the Agency
and/or owners and operators must identify when the owner or operator no
longer qualifies for self-insurance under the financial test; (3) the
owners or operators that no longer qualify for the financial test must
be able to quickly obtain an alternate instrument(s) to cover their
obligations instead of self-insuring; and (4) the requisite instruments
must in turn be available to such owners and operators who no longer
are able to self-insure. The Agency is concerned, however, that third-
party financial instruments may not be available to a company that is
experiencing a period of financial hardship. While, in general, such an
issue has not been a widespread problem in other EPA financial
responsibility programs, the Agency is concerned that the highly
cyclical, capital-intensive nature of the mining industry may present
unique challenges under a CERCLA Sec.  108(b) rule for hardrock mines.
    There are several other broader considerations with respect to the
adoption of a financial test. First, EPA has concerns regarding the
extent to which sufficient resources and expertise will be available to
implement a financial test under CERCLA Sec.  108(b). Second, EPA has
policy concerns about: (1) Whether offering a financial test would
adversely affect the incentives created by the rule for better
practices; (2) the potential inequity of offering a test due to the
advantage that the test may create for larger versus smaller owners and
operators; and (3) whether, given the potentially significant costs
associated with Superfund liabilities, should the financial test fail
as an instrument, these costs may not be paid or may fall to the
taxpayer to pay. All of these considerations are discussed elsewhere in
the preamble. The Agency remains extremely concerned regarding the boom
and bust nature inherent to the hardrock mining industry and recent
volatility in commodity prices and global markets. History suggests
that the increased risk of default for these companies makes this
sector particularly problematic from the perspective of allowing them
to self-insure through a financial test. Finally, many hardrock mining
facilities require long-term care, such as long-term water treatment of
acid mine drainage. Allowing owners or operators to self-insure where
such long-term liabilities are anticipated may be ill-advised given
that some sites require treatment into perpetuity. It should be noted
that, although EPA currently allows the use of a financial test under
various agency programs,\78\ other agencies have chosen not to allow
the use of a financial test for owners and operators in the mining
sector.79 80 81 EPA discusses all of these factors in the
following sections of this preamble.
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    \78\ The financial test is an allowable instrument under RCRA
Subtitle C, Subtitle D, and Subtitle I regulations, as well as under
the Underground Injection Control (UIC) program.
    \79\ See 43 CFR Sec.  3809.570(a) through (c) related to self-
insurance and pre-existing self-bonds under BLM regulation.
    \80\ See U.S. Forest Service, Forest Service Manual Sec. Sec.
2817.24; 6562 (2008).
    \81\ For example, the Federal agency that regulates surface
mining of coal recently advised states to not allow self-insurance
by mining companies and also announced that it was changing the
federal rules regarding self-insurance under the Surface Mining
Control and Reclamation Act (SMCRA).
    See: http://www.eenews.net/eenewspm/stories/1060041689
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b. Option 1--No Financial Test (Preferred Option)
    Under this option, which EPA prefers, the Agency is proposing an
approach under which a financial test would not be available for use by
hardrock mining facilities subject to this rule. Under this approach,
owners or operators could demonstrate financial responsibility only by
using a trust fund, insurance, a letter of credit, or a surety bond, or
a combination of those instruments. A corporate guarantee, which is
based on the financial test, would not be available. EPA is proposing
this option as a preferred option based on a number of factors. Covered
initially are four broader factors of concern regarding the
appropriateness of financial tests under CERCLA Sec.  108(b). Further
discussion follows that also outlines factors for why the use of any
financial test would be particularly problematic for the hardrock
mining industry. (1) Concerns regarding the use of a financial test
under CERCLA Sec.  108(b).
    The Agency considered several concerns regarding the use of a
financial test under this proposed rule. The Agency first considered
the work involved in overseeing a financial test in the context of
CERCLA Sec.  108(b). EPA is particularly concerned about the
administrative burden of a test under CERCLA Sec.  108(b) given the
freestanding nature of the CERCLA Sec.  108(b) obligation that would
not be buttressed by a permitting program. Observers, more generally,
have commented that the financial test poses additional administrative
burden. For example, in a 2001 audit of the RCRA Subtitle C financial
assurance program, the Agency's OIG reported that financial tests pose
unique administrative complexities that raise their implementation
burden.\82\ In 2005, when GAO was tasked with identifying obstacles to
full realization of the ``polluter pays'' principle, GAO observed that
financial tests and corporate guarantees are among the instruments that
pose the greatest financial risk to the Government and are an
administrative burden since they require specialized expertise to
oversee.\83\ The Agency is considering whether the unique
characteristics of the CERCLA Sec.  108(b) financial responsibility
program and of the hardrock mining industry may increase the
administrative burden of implementing a financial test, and make the
use of a financial test less appropriate under this proposed rule than
under other Agency programs. EPA solicits comment on this issue.
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    \82\ See EPA Office of Inspector General. RCRA Financial
Assurance for Closure and Post-Closure. March 30, 2001. 2001-P-007.
    \83\ See Government Accountability Office. Environmental
Liabilities: EPA Should Do More to Ensure That Liable Parties Meet
Their Cleanup Obligations. August 2005. GAO-05-658.
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    As discussed earlier, successful use of a financial test requires
adequate oversight by the regulatory agency to assure that financial
submissions are accurate and adequate, and that when owners or
operators no longer meet the requirements of the financial test they
secure an alternative financial responsibility instrument in a timely
manner. Generally, where a financial responsibility requirement is tied
to a permit, EPA has ongoing oversight of the owners or operators of
the facility,

which supports implementation of a financial test at that facility. For
example, under EPA's RCRA Subtitle C regulations for permitted
hazardous waste treatment, storage, or disposal facilities, EPA
receives extensive information about the facility in its permit
application under 40 CFR part 270, and conducts regular and detailed
inspections of the facility, including both the physical operations and
financial assurance information required under the permit. As described
earlier, however, CERCLA Sec.  108(b) is an independent financial
responsibility requirement that is not associated with a permit
program, so the Agency may have less immediate access to information
regarding the current status of the facility.
    The Agency has attempted to address some of these concerns by
structuring the proposed financial test to reduce implementation
concerns, for example, by including reliance on credit rating. (This
issue is discussed in section VI.C.4. of this preamble). However, even
with the proposed financial test, the Agency would still be required
to, at a minimum, verify the credit ratings, and to annually review
financial submissions to assess whether the company meets other test
requirements, such as coverage multiple requirements \84\ related to a
company's tangible net-worth and the value of their U.S. Assets. This
review is potentially complex and may require a level of financial
expertise not readily available in all ten EPA Regional Offices. For
example, the data in the Chief Financial Officer (CFO) letter \85\ may
vary from the latest annual financial statements. Professional judgment
may be needed to evaluate deviations between the CFO letter and audited
statements, which increases the administrative burden and the demand
for technical expertise to implement the financial test.
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    \84\ In this proposal, an owner or operator eligible to use this
financial test for any portion of its CERCLA Sec.  108(b)
obligations also would be subject to a coverage multiple requiring
them to have both a tangible net worth and U.S. Assets each
equivalent to at least six times the amount of environmental
obligations covered by a financial test. The U.S. Asset requirements
could also be met by demonstrating that at least ninety percent of
total assets are located in the United States.
    \85\ To demonstrate passage of the financial test, owners or
operators would be required to annually submit a standardized letter
to the Administrator signed by its CFO.
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    In addition, the efficacy of the financial test proposed under
Option 2 depends on the accurate and accessible accounting of covered
environmental obligations company-wide to meet the U.S. assets and
tangible net worth coverage multiple requirements. These requirements
will be implemented by EPA Regional offices, but the co-proposed
financial test includes nationwide obligations as part of the
calculation, to ensure effectiveness of the test. This may necessitate
verification of information located in another region or held by
another agency or state entity, which could be a very timely and costly
process.
    The Agency has found implementation of a financial test under other
Agency financial responsibility programs to present challenges. EPA is
concerned that under CERCLA Sec.  108(b), without the structure of a
permit program and the level of interaction and knowledge of site
conditions that it provides, it may be even more challenging to
successfully oversee and implement.
    Second, EPA is concerned that the use of a financial test may limit
the realization of one of the potential benefits of this rule--the
development of better mining practices. EPA believes that this is an
important impact of this proposed rule. As explained in the discussion
of the financial responsibility formula, EPA has built such incentives
into that aspect of the rule. Those incentives are reinforced by the
effect that an owner or operator adopting sound practices can be
expected to be able to purchase an instrument from a third party, for a
reduced amount of coverage and at a reduced cost. Similarly, some
third-party providers may encourage owners and operators to adopt safer
practices as well. However, with a financial test, so long as the owner
or operator can meet the test requirements and avoid the need to obtain
third party coverage, the cost savings incentive to implement improved
practices may be lost, along with the associated risk reductions they
would afford. Therefore, the Agency believes that providing a financial
test under this proposed rule could reduce salutary effects of the
rule. Further, because financial tests are available to the owners or
operators that are best able to bear the costs, this reduced incentive
affects the owners or operators in the best position to invest in
improved practices.
    Third, the Agency is further concerned that because of the
potentially high costs associated with Superfund liabilities,
particularly from hardrock mining facilities, and the potential for
such costs falling to the taxpayer should the financial test fail, it
might not be an appropriate instrument for use under CERCLA Sec.
108(b). Under the proposed rule, owners or operators would be required
to establish and maintain financial responsibility to cover all CERCLA
Sec.  107 liabilities at their facilities--response costs, natural
resource damages, and health assessment costs.\86\ In many Superfund
cases, and particularly in the case of hardrock mining facilities,
these costs can be quite high. Thus as noted in the introductory
discussion, use of a financial test for such large amounts presents a
larger risk to the public should cases arise where the financial test
fails to be effective.
---------------------------------------------------------------------------

    \86\ Facilities with obligations under other statutes will be
separately responsible for meeting the financial assurance
requirements, such as those under RCRA Subtitle C and Underground
Injection Controls (UIC) programs.
---------------------------------------------------------------------------

    Finally, because the financial test co-proposed in this rule is by
design only available to the owners or operators best able to bear the
costs, the Agency recognizes that allowing the use of a financial test
in this rule would provide an economic advantage (in the form of a cost
savings) to the economically strongest owners or operators, and
potentially create an economic and competitive disadvantage for others.
    The Agency solicits comment on the concerns identified by EPA
regarding the use of a financial test under CERCLA Sec.  108(b).
(2) Concerns Regarding Use of a Financial Test by the Hardrock Mining
Industry
    Beyond concerns related to the use of a financial test under CERCLA
Sec.  108(b), EPA considered issues specific to the use of a financial
test for the hardrock mining industry under 108(b). First, there are
significant concerns that owners or operators that are no longer able
to meet the requirements of a financial test may become less able than
owners or operators in other industries to secure an alternative
financial responsibility instrument. One reason is because frequent
fluctuations in commodity prices within the hardrock mining industry
may result in sharp declines in production and accelerated mine
closures. This scenario is currently playing out in the case of the
coal mining industry.\87\
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    \87\ In recent years, the banking industry has been stepping
back from providing loans to the coal industry:
     In 2015, Bank of America cut off its financing for coal
extraction projects to reduce its exposure. (Kate Sheppard, Bank of
America Backs Away from Funding Coal Mining, Huffington Post. May 6,
2015.)
     In 2015, Citi Group and Goldman Sachs Group sold its
investments in mining and reduced its financing of coal mining
operations faced with large environmental obligations. (Jeanne
Dugan, Timothy Puko, Goldman Sachs Sells Colombian Coal Mines to
Murray Energy, The Wall Street Journal. April 13, 2015; Kadhim
Shubber, Citi Promises to Cut Lending to Coal Miners, Financial
Times. October 5, 2015.)
     In 2016, JPMorgan announced it would be no longer
finance new coal-fired plants in the U.S. (Michael Corkery, As
Coal's Future Grows Murkier, Banks Pull Financing, New York Times.
March 20, 2016.)

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    Many mineral resource extraction firms are not able to absorb
market fluctuations because they lack diversified lines of business.
This may make it harder to ensure that owners or operators who do fail
the test obtain a replacement instrument.\88\ Furthermore, requiring a
company to purchase a more expensive means of financial assurance once
it begins to experience liquidity problems may only serve to aggravate
its financial difficulties. This effect also makes it harder for EPA to
oversee the use of the financial test. For example, rapid fluctuations
in financial status may necessitate more frequent reporting to the
Agency, resulting in increased oversight burden, as discussed earlier.
Thus, it may be more important in the case of mining than in other
industries to require an owner or operator to secure a third-party
financial responsibility instrument or fund a trust fund when it is
financially able to do so.
---------------------------------------------------------------------------

    \88\ These concerns were noted in the 2005 report from the
Government Accountability Office, EPA Should Do More to Ensure that
Liable Parties Meet Their Cleanup Obligations, at p. 42. Available
at http://www.gao.gov/products/GAO-05-658.
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    Second, numerous troublesome cases have occurred involving hardrock
mining facilities that have gone through bankruptcy, while leaving
extremely significant environmental impacts in their wake. Remedial
work can be stopped or slowed in situations where the owner or
operator's cash flow and revenue is reduced or they go bankrupt. Such
impacts have occurred in the past when owners or operators of mines
engaged in CERCLA cleanups have had to negotiate changes to the scope
of work due to drops in metal prices. EPA experienced this problem when
a major mining company slowed work at sites and then filed for
bankruptcy in 2005. The company was using a financial test (which was a
less sensitive financial test than the test proposed under Option 2)
under a CERCLA Consent Decree with EPA at a smelter site in the
northwest part of the U.S. EPA discovered that the company was having
financial struggles, despite having recently submitted information that
it met the necessary financial test requirements. In response, EPA
requested that the company obtain a liquid financial responsibility
instrument under the provisions of a consent decree, but the company
was unable to do so, given its declining financial condition.
    Third, given the relative market volatility observed within the
hardrock mining industry, some have argued that there are no
circumstances under which owners or operators of hardrock mining
companies should be allowed to self-insure through a financial test.
Analysis has shown that mining companies can be more likely to default
on their financial obligations than other types of companies.\89\ For
example, the recent downturn in metals prices has led to a default rate
in the metals and mining sector which is nearly three times the
economy-wide corporate default rate.\90\ Moreover, financial analysts
have predicted that mining sector default rates are likely to rise.\91\
Mining companies also tend to default more quickly than other types of
companies,\92\ and may have multiple mining operations, meaning that a
single failure could have broader impacts.
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    \89\ See Standard & Poor's 2014 Global Corporate Default Study
at p. 11. Available at: https://www.nact.org/resources/2014_SP_Global_Corporate_Default_Study.pdf. (While the total number
of defaults in 2014 declined from previous years, the default rate
in the energy and natural resources industry rose to 25 percent.
Eight of the 15 companies that defaulted were metals, mining, and
steel companies.)
    \90\ See Energy, Mining Companies Lead Debt Default Rates
Higher,'' 24/7 Wall St. (Aug. 14, 2015). Available at: http://247wallst.com/banking-finance/2015/08/14/energy-mining-companies-lead-debt-default-rates-higher/ (Overall corporate default rate for
the twelve months trailing July 2015 was 2.5 percent, while the
trailing rate for exploration and production companies was 5
percent, and the rate for metals and mining companies was 7.1
percent).
    \91\ See Why Bankruptcy Might be the Mining Industry's Last Best
Hope, Bloomberg Business (Dec. 2, 2015), http://www.bloomberg.com/news/articles/2015-12-03/why-bankruptcy-might-be-the-mining-industry-s-last-best-hope (warning that falling commodities prices
and an oversupplied market will trigger more bankruptcies in the
mining sector); Warning of another string of mining bankruptcies in
2016, (Mar. 1, 2016), http://www.mining.com/warning-of-another-string-of-mining-bankruptcies-in-2016/ (noting dramatic credit
deterioration in the oil & gas, and metals and mining sectors,
``with no other sectors even in the same ballpark,'' and with credit
conditions expected to worsen in 2016).
    \92\ See Standard & Poor's 2014 Global Corporate Default Study
at p. 44. The time to default from original credit rating for energy
and mining companies is 3.9 years versus 5.7 years for the economy
overall. The time to default from ``post-original rating'' for the
energy & resources sector is even shorter, at an average of just 2.1
years.
---------------------------------------------------------------------------

    EPA is concerned that close linkage between the hardrock mining
industry and global commodity prices means that companies that are
invested in the same minerals are likely to fail or experience
financial hardship at the same time, when the prices of these minerals
decline.\93\ If so, additional strain would be placed on EPA's ability
to administer the test and ensure compliance across multiple companies
at multiple sites simultaneously.
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    \93\ See Moody's Investors Service, ``Moody's places energy and
metals & mining issuers on review for downgrade,'' (Jan. 22, 2016),
https://www.moodys.com/research/Moodys-places-energy-and-metals-mining-issuers-on-review-for-PR_342773 (announcing placement of 55
metals and mining companies on review for downgrade); Moody's
Investors Service, Moody's places 11 mining companies in the U.S. on
review for downgrade (Jan. 21, 2016), https://www.moodys.com/research/Moodys-places-11-mining-companies-rated-in-the-US-on-PR_342543 (warning of an ``unprecedented shift'' in the mining
industry and advising that ``deteriorating industry fundamentals
require a recalibration of the global mining portfolio rated by
Moody's'').
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    Congress and the states have expressed concern over the volatility
in the mining industry and the potential inability of a financial test
to account for rapidly changing market conditions, asking the
Comptroller General for a review of self-insurance
practices.94 95
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    \94\ Self-bonding may be otherwise understood to mean self-
insurance.
    \95\ A recent letter from Senators Maria Cantwell of Washington
and Richard Durbin of Illinois to the Comptroller General requested
an investigation by GAO into the use of self-bonding across federal
programs governing resource extraction, and a performance audit of
self-bonding under the Surface Mining Control and Reclamation Act.
The letter, dated Mar. 8, 2016, is available at http://www.energy.senate.gov/public/index.cfm/files/serve?File_id=47C14E0B-8A9D-457F-A1DE-0B7135144E1B.
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    EPA has information that decisions in the mining industry to expand
or open new facilities are generally made over a longer period of time
than some other industries (on for example, a ten-year, twenty-year, or
longer amortization and investment basis).\96\ Such investment
decisions often don't always correspond to the demand cycle for the
commodity.\97\ Moreover, mining assets generally are immobile, making
it difficult to transfer equipment and facilities to other productive
uses during periods of low demand.
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    \96\ Investments within the hardrock mining sector tend to be
longer term given the lifetime of typical mines and the extreme
amount of capital that must be invested up-front. Such investments
and assets must therefore be amortized or written-off over a longer
period of use. Firms will utilize amortization for spreading out of
capital expenses for intangible assets over a specific period of
time (usually over the asset's useful life) for accounting and tax
purposes. Amortization is similar to depreciation, which is used for
tangible assets, and to depletion, which is used with natural
resources.
    \97\ See J.T. Bradbury, International Movements and Crises in
Resource Oriented Companies: The Case of Inco in the Nickel Sector,
Economic Geography, Vol. 61, No. 2, 1985.
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    Mining companies generally attempt to manage cyclical patterns by
balancing new investment with projected sales of minerals.\98\ Metal
prices, however, can

unfortunately experience substantial increases or decreases over a
relatively short time period. The speed of these price changes results
in swings in market volatility rendering it difficult for a capital-
intensive industry like mining to adjust quickly. Analysis of price
cycles from composite metals indices for certain metals, over the past
thirty years, reveal that there have been between three and five price
cycles lasting between five and eight years, depending on the metal.
Typically, the peak price occurs during the first half of the cycle,
often exactly halfway between the two trough prices. Price fluctuations
tend to happen rapidly with prices increasing by more than 75 percent
in one month, or decreasing by more than thirty percent over the course
of a month.\99\
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    \98\ See Philip Maxwell, Was there a Nickel Shakeout?, Minerals
and Energy, Vol 21, No. 3-4, 2006. J.T. Bradbury, International
Movements and Crises in Resource Oriented Companies: The Case of
Inco in the Nickel Sector, Economic Geography, Vol. 61, No. 2, 1985.
    \99\ See Background Document for Financial Test Analyses,
Industrial Economics, Inc. (IEc). 2016.
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    ``Mining companies have volatile earnings, coming from
macroeconomic factors that are not in their control. As the economy
weakens and strengthens, mining companies see their earnings and cash
flows track with the commodity price.'' \100\ And the stability of
earnings and cash flow of mining companies is significantly less than
the average of other industries.\101\ Significant income fluctuations
are also compounded by the fact that many mines use debt financing to
support the large infrastructure investments needed to get a mine
started and to expand operations.\102\ This leads to high volatility in
equity values and debt ratios for mining companies.\103\
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    \100\ See Valuation of Metals and Mining Companies, Svetlana
Baurens, p. 56 (July 11, 2010). Available at: http://www.basinvest.ch/upload/pdf/Valuation_of_Metals_and_Mining_Companies.pdf.
    \101\ See Rating Companies in the Mining Industry, p.7 (June
2011). Available at: http://www.dbrs.com/research/240365/rating-companies-in-the-mining-industry.pdf.
    \102\ See Valuation of Metals and Mining Companies, Svetlana
Baurens, p. 13 (July 11, 2010). Available at: http://www.basinvest.ch/upload/pdf/Valuation_of_Metals_and_Mining_Companies.pdf.
    \103\ Ibid.
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    Mining profits are also generally tied to revenue rather than
operating costs because operating costs tend to be highly fixed in the
industry.\104\ ``Commodity price is a principal determinant of revenue,
but it is also the factor with which the greatest level of financial
risk is associated.'' \105\ Today, many mines cannot survive these
price fluctuations.\106\ During low price periods, the mining industry
tends to contract since they are losing revenue with increased periods
of bankruptcy and company consolidation. Over the past 25 years, the
rate of mining bankruptcies has spiked during sharp price declines and
sustained periods of low prices. Between 1981 and 2010, there were
approximately 43 mining company bankruptcies, not counting smaller
mining operations that may undergo personal, rather than corporate,
bankruptcy.
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    \104\ Ibid.
    \105\ See Valuation of Metals and Mining Companies, Svetlana
Baurens, p. 36, July 11, 2010. Available at: http://www.basinvest.ch/upload/pdf/Valuation_of_Metals_and_Mining_Companies.pdf.
    \106\ See Background Document for Financial Test Analyses,
Industrial Economics, Inc. (IEc). 2016.
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    During the recent economic recession (characterized by the stock
market drop in September 2008) for example, copper, nickel, tin, and
zinc prices fell more than twenty percent between September and October
2008.\107\ Notwithstanding periods of market volatility, on average,
metal prices also generally experience a three to seven percent
increase or decrease on a monthly basis. This further substantiates
that the mining industry must operate under a great deal of
uncertainty, often facing greater and more frequent changes in expected
market return than other sectors.
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    \107\ Gold responded differently. For ten years the price of
gold rose quickly, aided especially by the stock market meltdown of
2009. After hitting its high in August 2011, gold saw a gradual
decline, even as the stock market rose into record territory. Then
gold plummeted 25 percent in mid-April 2013, seeing its biggest one-
day decline in more than thirty years on April 15, 2013.
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    Such volatility impacts the effective use of a financial test by
hardrock mining facilities. The cyclical nature of the industry and the
rapid fluctuations in commodity prices may result in corresponding
fluctuations in the financial health of hardrock mining companies.
Whereas a mining company may accumulate substantial amounts of cash
flow from operating activities during a period of peak prices, a price
trough likely would result in decreased revenues, and corresponding
decreased cash flow.
    However, because of falling revenues and potentially compromised
cash flow stemming from commodity price swings, EPA is concerned that
companies may have insufficient tangible assets (financial reserves) to
establish alternate financial instruments in years where they are
unable to pass the financial test.\108\
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    \108\ As stated by the U.S. General Accountability Office, ``If
a company that passed the test later files for bankruptcy or becomes
insolvent, the company in essence is no longer providing financial
assurance because it may no longer have the financial capacity to
meet its obligations. Such financial deterioration can occur
quickly. While companies no longer meeting the financial test are to
obtain other financial assurance, they may not be able to obtain or
afford to purchase it.'' GAO. EPA Should Do More to Ensure That
Liable Parties Meet their Cleanup Obligations (2005). Available at:
http://www.gao.gov/products/GAO-05-658.
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    In 2000, the BLM identified similar concerns when it decided to
prohibit new corporate guarantees for future reclamation work to
restore lands when hardrock mining operations cease.\109\ Commenters at
the time noted that because the value of the ore fluctuates over time
and may lose value as it is mined, that the soundness of the guarantee
might be most questionable at the time it is most needed.\110\ In
making the decision to eliminate self-insurance from its hardrock
mining regulations, BLM cited both the Bureau's lack of expertise to
perform the periodic reviews of companies' assets, liabilities, and net
worth that would be necessary to oversee guarantees, as well as the
fact that even with annual reviews by skilled staff, a default risk
would remain. BLM therefore decided to shift the financial risk to the
businesses they regulate who have to purchase financial assurances from
independent third parties, such as banks. In a 2005 report, GAO
identified examples of BLM's inability to collect funds for reclamation
when operators of hardrock mines using corporate guarantees filed for
bankruptcy.\111\ The inability of companies to be able to afford
alternate financial assurance when failing the financial test could be
exacerbated in the CERCLA Sec.  108(b) context by the potentially high
costs associated with Superfund liabilities, particularly from hardrock
mining facilities. Owners or operators would need to secure a third-
party financial responsibility instrument or fund a trust fund for a
high dollar amount in a time when their financial health may be
compromised, which may be difficult or impossible. The Agency solicits
comment on these concerns.
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    \109\ See 65 FR 69998, at 70074, November. 21, 2000, stating:
``We agree that a corporate guarantee is less secure than other
forms of financial guarantees, especially in light of fluctuating
commodity prices. Recent bankruptcies added to the concern that
corporate guarantees don't provide adequate protection. We believe
the number of new mines that might have wanted to rely on corporate
guarantees is relatively small, and we also believe, given the
economics of the industry, that companies that would have been
eligible to hold a corporate guarantee should not have a significant
problem finding a third-party surety, or posting the requisite
assets.''
    \110\ Id., at 70073.
    \111\ See GAO. Hardrock Mining: BLM Needs to Better Manage
Financial Assurances to Guarantee Coverage of Reclamation Costs,
GAO-05-377 (Washington, D.C.: June 20, 2005). Available at: http://www.gao.gov/products/GAO-05-377.
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    As a fourth and distinct concern, when a mine is reaching the end
of its life and is bringing in less revenue, the owner or operator may
not be able to secure a financial responsibility instrument for CERCLA
liabilities that may continue to be required after the

mine closes. If a company fails the financial test after its mining
facility closes, it may thus not be able to obtain alternate financial
responsibility that may be required after the facility closes. EPA
solicits comment on the likelihood of this scenario.
    As a fifth concern, allowing a financial test under this proposed
rule for hardrock mining would be inconsistent with the approach taken
by some other Federal regulators that have experience and expertise in
the regulation of the hardrock mining facilities. After having formerly
allowed a financial test, BLM modified its regulations at 43 CFR part
3809 and removed the financial test as an available financial
responsibility instrument; \112\ the U.S. Forest Service regulations
governing financial responsibility requirements applicable to locatable
minerals operations also do not allow the use of a financial test;
\113\ and the Nuclear Regulatory Commission, explicitly prohibits the
use of self-insurance for uranium mills.\114\ EPA is concerned that
allowing the use of a financial test under this proposed rule would be
inconsistent with the approach to hardrock mining financial
responsibility that has developed through these other Federal programs.
Further, not allowing a financial test would reflect the experience and
expertise of these regulators, all of which have determined that a
financial test is not appropriate for hardrock mining facilities. The
Agency solicits comment on these concerns.
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    \112\ See Mining Claims under the General Mining Laws; Surface
Management 65 FR 69998 @70073-70074, November 21, 2000. BLM cited
the necessity to review submissions annually as well as its limited
capacity to do so, as contributing factors in its decision not to
allow additional use of a financial test. Further justifying its
decision, BLM stated that even if it had the expertise to perform
reviews on a periodic basis, the risk of default remains.
    \113\ See 36 CFR 228.13 (allowing a bond, blanket bond, or
cash).
    \114\ See 10 CFR 40 Appendix A criteria 9,
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    Finally, as noted earlier, the Agency is concerned that a financial
test for the hardrock mining industry may not fully reflect the
financial health of the owner or operator. Based on experience from
requiring financial responsibility for CERCLA consent decrees, EPA has
learned that mining companies often do not list ``contingent''
liabilities, such as the potential need for long-term operation and
maintenance (``O&M'') on their corporate balance sheets, at least not
during the early exploration and start-up phases of a mine. As such, a
balance sheet can show that a given company has sufficient assets to
meet the requirements of the financial test, despite the fact that all
or a portion the recorded assets may be zeroed out by unrecorded
``contingent'' liabilities. The Agency solicits comment on this
concern. Specifically, EPA is concerned that the six times multiples
for tangible net worth and U.S. assets that have worked well in the
RCRA Subtitle C program would not be effective for a mining industry
with the potential for large contingent liabilities.