33902 Federal Register No. 162 Proposed Rulesfacility operations (47 FR 16554). Under the liability coverage regulations (40 CFR 264.147 and 265.147), owners and operators of all types

Federal Register / Vol. 50, No. 162 / Wednesday, August 21, 1985 / Proposed Rules

ENVIRONMENTAL PROTECTIONENVIRONMENTAL PROTECTIONAGENCY

40 CFR Parts 264 and 265

[SWH-FRL 2865-7]

Standards Applicable to Owners andOperators of Hazardous WasteTreatment, Storage, and DisposalFacilities: Liability Coverage

AGENCY: Environmental ProtectionAgency.

ACTION: Notice of proposed rulemakingand request for comment.

SUMMARY: The Environmental ProtectionAgency (EPA or Agency), consideringwhether to revise the financialresponsibility requirements in 40 CFRSections 264.147 and 265.147, 265.151 (i)and (j), is today requesting comments onthe availability of insurance to satisfythe existing liability coveragerequirements for owners and operatorsof hazardous waste facilities and onmethods for the Agency to addresspotential restrictions in the availabilityof coverage. Owners and operatorsreportedly have encountered difficultiesin obtaining insurance necessary tocomply with these requirements.

EPA is considering whether anyrevisions to 40 CFR Sections 264.147 and265.147 are necessary in light of thecurrent state of the insurance market.This rule sets forth several regulatoryoptions under consideration by theAgency, and also requests comments ona range of subjects related to theavailability of insurance policies thatmay be used to comply with the liabilitycoverage requirements. [Otheralternatives considered by EPA wouldrequire new legislation and are notconsidered in this proposal.)DATE: Comments must be submitted onor before September 20, 1985.

ADDRESSES: Comments may be mailedto Docket Clerk, Office of Solid Waste(WH-562, U.S. EnvironmentalProtection Agency, 401 M Street, SW.,Washington, D.C. 20460. Commentsreceived by EPA may be inspected inRoom S-212, U.S. EPA, 401 M Street,SW., Washington, D.C. 20460 from 9:00a.m. to 4:00 p.m., Monday throughFriday, excluding holidays.

FOR FURTHER INFORMATION CONTACT:RCRA Hotline, toll free, at (800) 424-9346 or at (202) 382-3000. For technicalinformation, contact Susan HughesOffice of Solid Waste [WH-5621, U.S.Environmental Protection Agency, 401 MStreet, SW., Washington, D.C. 20460(202) 382-4761.

SUPPLEMENTARY INFORMATION: Thecontents of today's rule are listed in thefollowing outline:

I. Background

A. Current Liability Coverage Requirements

B. Liability Insurance for RCRA Facilities1. Policy Types

a. CGL Policiesb. EIL Policies

2. Reasons for Market Conditions

I. Request for Comments

A. Current Market Situation and Reasons forIts Decline

B. What Will Improve the Market

C. "Insurability"

II. Possible Regulatory Approaches toPotential Problems

A. Maintain the Existing Requirements

B. Clarify the Required Scope of Coverageand/or Lower the Limits

C. Authorize Other Financial ResponsibilityMechanisms

D. Authorize Waivers

E. Suspend or Withdraw the LiabilityCoverage Requirements

IV. Executive Order 12291

V. Paperwork Reduction Act

VI. Regulatory Flexibility Act

I. Background

A. Current Liability CoverageRequirements

Section 3004(a)(6) of the ResourceConservation and Recovery Act(RCRA), as amended, requires EPA toestablish financial responsibilitystandards for owners and operators ofhazardous waste management facilitiesas may be necessary or desirable toprotect human health and theenvironment.

EPA promulgated the financialresponsibility standards for bothliability coverage and financialassurance for closure and post-closurecare on January 12, 1981. On October 1,1981, EPA deferred the effective date ofthe regulations governing liabilitycoverage and announced its intent topublish a proposal to eliminate theliability requirements (46 FR 48197). TheAgency at that time questioned whetherthose requirements were necessary ordesirable to meet the requirements ofRCRA. In response to thatannouncement EPA receivedconsiderable comment from the public,regulated industries, insurancecompanies, members of Congress, andState agencies. These commentsindicated widespread support for aFederal liability coverage requirement

for hazardous waste managementfacilities; there was virtually noopposition to such a requirement.

On April 16, 1982, EPA promulgatedregulations requiring owners andoperators to demonstrate liabilitycoverage during the operating life of thefacility for bodily injury and propertydamage to third parties resulting fromfacility operations (47 FR 16554). Underthe liability coverage regulations (40CFR 264.147 and 265.147), owners andoperators of all types of TSDFs arerequired to demonstrate, on a per firmbasis, liability coverage for sudden andaccidental occurrences in the amount of$1 million per occurrence and $2 millionannual aggregate, exclusive of legaldefense costs. Owners and operators ofsurface impoundments, landfills, andland treatment facilities are alsorequired to demonstrate, on a per firmbasis, liability coverage for nonsuddenaccidental occurrences in the amount of$3 million per occurrence and $6 millionannual aggregate, exclusive of legaldefense costs. "First-dollar" coverage isrequired; the amount of any deductiblemust be covered by the insurer, withright of reimbursement from the insured.Financial responsibility can bedemonstrated through a financial test,liability insurance, or a combination ofthe two.

The requirements for coverage ofsudden accidental occurrences becameeffective on July 15, 1982. Therequirements for nonsudden accidentaloccurrences were phased in gradually.Firms with annual sales or revenue of$10 million or more were required tosubmit evidence of this coverage byJanuary 16, 1983. Firms with annualsales or revenue of $5 million to $10million were required to submitevidence of coverage by January 16,1984. All other firms were required todemonstrate such coverage by January16, 1985.

The requirements assure that fundswill be available for third partiesseeking compensation for bodily injuryand property damage arising from-facility operations. Furthermore,insurance is a vital part of the Agency'sregulatory program for improvingenvironmental management practices ofinsured parties. It is also less Federally-intrusive than other approaches such asprovision of insurance by the FederalGovernment. In addition, by offsetting adegree of activity-related risk, insurancefosters broad participation in hazardouswaste management. The requirementsmay also instill public confidence in'hazardous waste management activitiesand help to gain public support for thesiting of new and improved facilities.

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Congress has also expressed itssupport for financial responsibilityrequirements. Section 213 of theHazardous and Solid WasteAmendments of 1984 (RCRA section3005(e)) provides for the termination ofinterim status for all land disposalfacilities by November 8, 1985, unless:(1) The owner or operator applies for afinal determination regarding theissuance of a permit by that date and (2)certifies that the facility is in compliancewith all applicable groundwatermonitoring and financial responsibilityrequirements for liability coverage,closure, and post-closure care.

Failure to comply with the liabilityrequirements can have other significantramifications. First, § 270.14(b)(17)requires that an owner or operatordemonstrate compliance with the RCRAliability requirements in the Part Bpermit application. The Agency mayexperience extreme difficulties inissuing RCRA permits without ademonstration of compliance inaccordance with the requirements in§ 264.147. Second, most authorizedStates have liability requirements ineffect that are equivalent to the existingFederal requirements. Therefore, in theabsence of any action by the Agency,owners and operators are still subject toRCRA requirements in authorizedStates. Consequently, until the Statesamend their regulations, owners andoperators would still be unable to certifycompliance with RCRA liabilityrequirements and they will lose interimstatus. Third, the owner or operator maybe subject to citizen suits under RCRAsection 7002 or Agency or Stateenforcement efforts. In addition,publicly-held firms unable to complymight be required to discloseinformation about their noncomplianceon their Securities and ExchangeCommission (SEC) 10-K and 10-Qfilings. (See 17 CFR Part 229.) If theinability to comply with the RCRAliability coverage requirements mightforce a firm to close down a facility orplant and that fact is deemed "material"(i.e., important to a reasonable investorin securities issued by that firm), thenthat fact might need to be disclosed.

Also, if a firm believes that a legalproceeding might be instituted against itbecause of a failure to comply with theliability coverage requirements, the firmmay be required to disclose that fact.Some Agency action may be desirableto forestall serious difficulties arisingfrom a widespread failure to complywith the liability coverage requirementsdue to a general lack of availableinsurance coverage. The Agency intends

to promulgate one of the options in thisnotice by November 8, 1985.

B. Liability Insurance for RCRAFacilities

1. Policy Types

Two basic types of liability coverageare available to cover third party bodilyinjury and property damage caused byRCRA facility operations:comprehensive general liability (or CGLpolicies) and environmental impairmentliability (or EIL policies). The terms andavailability of these two types ofpolicies vary significantly. Both types ofinsurance are sold to a wide variety offirms in addition to owners andoperators of RCRA facilities.

There are two basic distinctions inpolicy types: claims-made andoccurence based. Under a claims-madeinsurance policy, coverage is triggeredonly when claims are made during thepolicy period. Insurers use the claims-made format to relieve themselves of theburden of claims brought long after theoriginal occurrence and to reduce thedifficulty of predicting the number ofclaims that will be made and the amountof damages that may be awarded. Anoccurrence based policy covers claimsarising from the events that occur duringthe policy period, regardless of when theclaim is filed.

The period of coverage under claims-made policies may be further expandedor restricted by incorporation of"discovery period" or "retroactiveperiod" provisions. The discovery periodprovision in a claims-made policyprovides that an insured, for thepayment of an additional premium, mayobtain an extension of coveragefollowing expiration of the policy, forlosses occurring during the policy periodbut which are not brought until after thepolicy's expiration. It is sometimesreferred to as an extended reportingperiod. The retroactive date in a claims-made policy limits coverage to damagescaused by occurrences that occurredsubsequent to that date.

a. CGL Policies. CGL policies havebeen widely available for decades. Theycover all types of third party damages,except those specifically excluded, andtherefore cover many types of damagesin addition to injuries caused byreleases of hazardous wastes. CGLpolicies are generally issued on anoccurrence basis. As a result of thispolicy feature and of uncertainty aboutwhat circumstances in the chain ofevents leading to third party damagesconstitute an "occurrence," insurers maybe required to defend and/or indemnifyparties they insured many years in thepast. Most standard CGL policies issued

since the early 1970's have excludedfrom coverage those damages caused bythe release of a pollutant that is not"sudden and accidental." A standardversion of the exclusion states that theinsurance does not apply "to bodilyinjury or property damage arising out ofthe discharge, dispersal, release orescape of smoke, vapors, soot, fumes,acids, alkalis, toxic chemicals, liquids orgases, waste materials or other irritants,contaminants or pollutants into or uponland, the atmosphere or anywatercourse 6r body of water; but thisexclusion- does not apply if suchdischarge, dispersal, release or escape issudden and accidental."

Recently, some courts have foundpollution exclusion clauses ambiguousand, in accordance with acceptedprinciples of contract law, haveinterpreted the ambiguity in favor of theinsured. Keene Corp. v. INA, 667 F. 2d1034 (D.C. Cir. 1981), cert. denied, 455U.S. 1007 (1982); Farm Family MutualInsurance Co. v. Bagley, 64 A.D. 2d 1014,409 N.Y.S. 2d 294 (4th Dept. 1978);Jackson Township Municipal UtilitiesAuthority v. Hartford Accident andIndemnity Co., 186 N.J. Super. 156, 451A.2d 990 (1982). As a result, insurersclaim they are being forced to defendand/or indemnify their insureds for risksthey did not knowingly assume whenthe. policies were issued. On the otherhand, some courts have interpreted thepolicies narrowly and accepted theexclusion. Barmet of Indiana v. SecurityInsurance Group, 425 N.E. 2d 201 (Ind.App. 1981); National StandardInsurance Co. v. Continental InsuranceCo., CA-3-81-1015-1 (N.D. Tex. October4, 1983); Great Lakes Container Corp. v.National Union Fire Insurance Co., 727F. 2d 30 (1st Cir. 1984); and AmericanStates Insurance Co. v. MarylandCasualty Co., Civ. No. 82-70353 (E.D.Mich. July 3, 1984).

The insurance industry has respondedto these interpretations in several ways.First, standard CGL policy forms arebeing rewritten to exclude all damagescausd by pollution. A new CGL formdeveloped by the Insurance ServicesOffice (ISO) will exclude all pollutionliabilities. This form has been filed forapproval with many State insurancecommissions. "Buy-backs" of coveragefor damages caused by sudden andaccident releases are expected to beavailable under these policies. Buy backis a type of coverage excluded under thebasic terms of tha policy which can beincluded for the payment of anadditional premium. Second, pendingthe approval of a revised CGL form,many insurance companies are issuingsome CGL policies with a restrictive

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endorsement excluding all coverage ofdamages caused by pollution. Third, theinsurance industry has also consideredissuing CGL policies on a claims-madebasis, rather than an occurrence basis.This change will generally requireamending the standard CGL policyforms and approval by State insurancecommissions. Fourth, insurers areresponding by reducing the availabilityof coverage. The CGL policies that coversudden and accidental releases havereportedly been difficult to obtain andcostly for firms that manage hazardouswastes or toxic substances.

b. EIL Policies. Environmentalimpairment liability (EIL) policies aredesigned specifically to cover thirdparty damages caused by pollution, andtherefore are narrower in scope thanCGL policies. Virtually all EIL policiesare issued on a claims-made basis. EILpolicies can be purchased to cover thirdparty damages caused by eithernonsudden incidents only or bothsudden and nonsudden incidents

EIL policies are a relatively recentphenomenon. Between the early 1970'sand 1981, coverage was generallyunavailable for nonsudden releases.Only a few excess and surplus linesinsurers offered such coverage. Excessand surplus lines are a designation thata State gives to insurance companiesthat provide insurance that is notreadily available from companieslicensed or "admitted" to transactbusines in that State. Because suchcompanies are not regulated directly,States often control their ability totransact businesss by regulating brokersand agents. By 1981, a market fornonsudden pollution liability coveragedeveloped because of increasing publicawareness of injuries caused by toxicsubstances and the Agency's proposedRCRA liability coverage requirements.

Many insurance companies enteredthe initial pollution liability market. ThePollution Liability Insurance Association(PLIA), a reinsurance pool, wasestablished in October 1981 with 37member companies. The PLIA now has42 members. At least a dozen other U.S.insurance companies and severalLondon-based insurers also marketedEIL policies.

The market for EIL policies reportedlyhas changed dramatically in the lastyear or two. The number of insurersoffering coverage has apparentlydeclined significantly. Some of thelargest EIL insurers such as Shand,Morahan and Co. Inc., and StewartSmith Mid-America, Inc. withdrew fromthe market. Based on anecdotalevidence, the cost of coverage hasapparently increased singificantly whilepolicy limits have declined. For

example, a company reported to EPAthat it recently purchased a policy withlimits of $3 million per occurrence and$6 million annual aggregate, theminimum acceptable limits fornonsudden accidental occurrencesunder the RCRA requirements, for$99,000. A year earlier they purchased apolicy with limits of $20 million peroccurrence and $20 million annualaggregate for about the same price.

2. Reasons for Market Conditions

A wide variety of explanations havebeen given for the apparent reducedavailabililty and increased cost of EILcoverage for RCRA facilities and otherinstallations. These reasons include:losses due to low premiums and largeclaims (reducing the availability andincreasing the price of reinsurance);difficulty of setting premiums based onrisk; judicial interpretation of policiesfavoring insureds; lack of compliancewith liability requirements; and thetragedy in Bhopal, India. Also, someinsurers have suggested that anotherpossible factor bearing on theavailability of EIL coverage is theapparent lack of demand for suchcoverage because of the lack ofcompliance with RCRA liabilitycoverage requirements.

In addition, over the past four years,both the primary insurance andreinsurance industries have incurredlarge underwriting losses throughout theproperty and casualty market sector. In1984, property and casualty insureressuffered a net loss of $3.55 billion, thefirst net loss for the insurance industrysince 1906, the year of the San Franciscoearthquake.

One reason for the insurance industrylosses is declining interest rates. Wheninterest rates were high in recent years,the insurance industry was willing towrite policies at a "loss" in order toobtain money that could then beinvested for a net profit. Consequently, ahighly competitive insurance industryoften accepted premiums thatapparently did not adequately reflcctaccepted policy risks. However,declining interest rates have reducedinvestment income and insurers are nolonger able to offset policy "losses."

It is important to note that insuranceindustry profits, like the stock market,are subject to changing economicconditions that are often cyclical. Duringperiods when economic conditionsresult in large insurance industry losses,the insurance industry may respond bycurtailing their riskiest policies. Thisresponse is due in part to the insuranceindustry's need to maintain a sufficientratio of premiums to reserves. In this

case, RCRA insurance is among thecurtailed policies.

Reinsurance is a mechanism whichspreads losses and risks by broadparticipation. Reinsurers providecoverage to insurance companies forexcess losses sustained in a certain lineor lines of coverage. Reinsurance acts asan incentive for insurance companies tocontinue writing policies in "tight"markets. Therefore, conditions in thereinsurance marketplace significantlyaffect the price, amount and type ofprimary insurance available to potentialinsureds. The abundance of inexpensivereinsurance in recent years was a majorfactor fueling competition amongprimary and excess insurers. Reinsurershave decided to raise rates andrestructure major factor fuelingcompetition among primary and excessthe risks they will underwrite becausethe primary insurers have notadequately screened the risks theyunderwrite. The result of tighter controlby reinsurers is a decrease in theavailability of policies written byprimary insurers in the affected lines ofcoverage. For example, the HartfordSteam and Boiler Inspection andInsurance Company and EnvironmentalRisk Assessement Service(International) Ltd., a major London-based pool of 15 EIL insurers, stoppedwriting pollution coverage last yearwhen they could not find reinsurance.

As we understand it, the insuranceindustry contends that RCRA insuranceis a high risk proposition for severalreasons. First, there is a lack of actuarialdata to establish realistic premiums thatadequately reflect risk. Second, there isa lack of acceptable and universallyapplied risk analysis methods. Third,there is a social perception thathazardous waste has not been andcannot be adequately managed. Theinsurance industry contends that thisperception will ultimately lead toseveral costly effects: third party claimsfor virtually all policies that theyunderwrite; a subsequent duty to defendagainst these claims; resultant highlitigation costs; and policy losses due tocourt rulings in favor of the insured forcoverage that the insurer did not intendto provide.

Litigation costs and court rulings oncoverage of hazardous waste relatedclaims, at present, appear to be twofactors of great concern to the insuranceindustry. As noted above, some recentcourt rulings have narrowly interpretedthe standard "pollution exclusion" in thestandard CGL form, following thejudicial tradition of interpretingambiguities in insurance contractsagainst the insurer. In several rulings,

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coverage was held to apply to thirdparty off-site bodily injury and propertydamage claims. The courts have alsofrequently ruled that the statute oflimitations does not begin in ahazardous waste tort case until a victimknew or reasonably should have knownof his or her injury. Therefore, whereCGL policies allows occurrence madeclaims, coverage may be provided longafter the policy has expired.

While the narrow judicialinterpretations of policy exclusions fornonsudden pollution do not explain theinsurance industry's reluctance to issuenonsudden policies, the industry isconcerned that such rulings, in effect,force insurers to assume liability forobligations they allegedly neverknowingly agreed, by contract, toassume, and for which they collected nopremium. Thus, insurers claim theycannot rely on the terms and conditionsof their policy contracts to estbli3h thescope of coverage from which insurersultimately estimate potential liabilityrisks and establish policy premiums.

The insurance industry places a largeportion of the responsibility forinsurance industry losses on a legalsystem that encourages suits against"deep pockets" and Federal and Stateliability provisions. However, thisproblem may also be attributed toambiguous insurance contracts thatcreated high potential exposure toinsurers. In fact, when the pollutionexclusion was inserted into the CCLpolicy in the 1970's, some insurersargued that the pollution exclusionlanguage did not clarify coverage, butrather only confused the definition of anoccurrence warranting coverage. Inaddition, hazardous waste managementwas not a high profile public issueduring the early 1970's. Therefore, it ispossible that the insurance industryinserted the pollution exclusion clauseinto the CGL policy aware of itspotential ambiguity but unaware of themagnitude of its potential implication.

This explanation finds furthercorroboration in current insuranceindustry efforts to eliminate policyambiguities. More restrictive CGLpolicies are now being drafted. Pollutioncoverage for both sudden andnonsudden events will be offeredthrough EIL policies on a claims-madebasis. However, it may be some timebefore the insurance industry hasrecovered from its current economiccondition and is willing to providesufficient EIL coverage.

Finally, the recent tragedy in Bhopal,India, has further heightened insurers'concerns about the riskiness of toxicsubstances. Insurers are concernedabout being required to pay for cleanup

costs under the strict, joint and severalliability standard of the ComprehensiveEnvironmental Reponse, Compensation,and Liability Act of 1980 (CERCLA). Theinsurers' concerns regard futureliabilities at CERCLA sites for whichthey had written liability coveragepolicies when the facilities weremanaged under RCRA.

Despite the recent publicity about thelack of insurance for owners andoperators of hazardous wastemanagement facilities and other firmsthat handle toxic substances, thePollution Liability Insurance Association(PLIA) has reported to the Agency arecent increase in its sales of EILpolicies. During the first quarter of 1985,PLIA sold more EIL policies andcollected more premiums than in theprevious year. In addition, AmericanHome/National Union InsuranceCompanies in the AmericanInternational Group, and The TravelersInsurance Company are still writingRCRA liability coverage. However,Travelers and PLIA apparently onlywrite coverage for firms which carryother insurance with their company.

II. Request for CommentsThis section of the notice requests

comments in four. areas: (1) The currentmarket for insurance policies that maysatisfy RCRA liability coverageobligations and reasons for the presentstate of the insurance market,particularly with regard to availabilityand rates; (2) what actions or eventsmight improve the market; (3) whattypes of firms, facilities, and risks arenot insurable; and (4) alternativeregulatory approaches that the Agencymay adopt in addressing possibleproblems. In answering the questionsthat foll6w, commenters are requestedto distinguish, where possible, thedifferent types of insurance policies:CGL policies that cover sudden andaccidental releases, EIL coverage forsudden and accidental releases, and EILcoverage for nonsudden and accidentalreleases. Although the primary focus ofthe Agency is on coverage for operatingRCRA facilities, relevant comments onthe insurance market for other types offirms and facilities will also beappreciated.

A. Market SituationTo determine if need exists for

modification of federal requirements dueto limitations in the availability of thirdparty liability insurance covering theoperation of RCRA facilities, the Agencyneeds a clear and detailedunderstanding of the current availabilityof insurance. Among the questions thatmust be addressed are the following:

What insurance.companies arecurrently offering EIL and/or CGLcoverage for RCRA facilities? Howmany insurance companies thatpreviously offered EIL coverage havewithdrawn from the market eithercompletely or selectively? Why did theywithdraw? What amounts of coverage(per occurrence and annual aggregate)are available and what amounts arecommonly sought for RCRA facilities?Are the current liability limits adequate?How do the amounts of coveragepurchased vary by the number offacilities covered, process types, wastesmanaged, and other factors? Is first-dollar coverage available? Is coverageexclusive of legal defense costsavailable?

What has been the experience ofinsurers and insureds under thesepolicies? How many policies have beencanceled by the insurer? Why havethese policies been canceled? Howmany claims based on events at RCRAfacilities have been paid? What amounthas been paid out in these claims? Howdoes this amount compare to thepremiums collected? Do the policies andpremiums create an effective incentivefor facility owners to reduce the risksthey present?

How much are the premiums? Howhave they changed in the last threeyears? What is the cost for the minimumacceptable amount of first-dollarcoverage? What are the costs of higherlevels of coverage? What are the mostimportant factors influencing the cost ofcoverage (e.g., facility age, design,process types, safety record, wasteshandled)?

What limitations are there in theavailability of reinsurance? Whatcompanies offer reinsurance in this lineof insurance? Why have the reinsurerswithdrawn from the market? Are anycaptive insurance companies providingcoverage for RCRA facilities? A captiveinsurance company is an insurancecompany set up by a company or groupof companies to insure their own risks,or risks common to the group. Are anyefforts underway to establish newcaptive insurance companies? Whatlimits the establishment of suchcaptives?

What are the major effects of anylimitations in the availability ofcoverage for RCRA facilities? Have anyfacilities closed solely because of thelack of insurance at an affordable price?How will the availability and cost ofinsurance influence decisions of ownersand operators of interim status facilitiesabout wbether to seek Part B permits?Are generators seeking greater liabilitycoverage because of a lack of coverage

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by the commercial facilities that handletheir wastes?

If sudden accidental occurrencecoverage and/or nonsudden accidentaloccurrence coverage is difficult orexcessively expensive to obtain, why?What are the most important causes ofthe limited availability of coverage?How important are the following factors:lack of demand for coverage; courtdecisions that broadly interpret policiesin favor of the insured; the difficulty ofpredicting the likelihood of claims, thecost of defense, and the cost ofjudgments against the insured; the fearof being liable for cleanup costs underCERCLA or other laws; the capacityshortage in the property and casualtyinsurance market; the lack ofreinsurance for environmental risks; andrecent concern aroused by the tragedyin Bhopal, India.B. What Will Improve the Market

The Agency recognizes that it has alimited ability to influence theavailability of insurance for RCRAfacilities. In this regard, the Agencysolicits comments addressing whatevents or actions will increase theavailability of coverage for owners andoperators of RCRA facilities. Whatactions by the. Agency, if any, wouldincrease the availability of coveragethat would satisfy the intent of theliability coverage requirements? Forexample, what would be the impact of:increased Agency and Stateenforcement efforts to ensurecompliance with the rules, which mightstimulate demand for coverage; and/orclarification by EPA of the term "suddenaccidental occurrences," so that it isexpressly narrower than theinterpretation some courts have appliedto that phrase in the CGL pollutionexclusion?

C. "Insurability"One of the purposes of the liability

coverage requirements is to encourageowners and operators of RCRA facilitiesto manage hazardous waste in anenvironmentally sound manner. Thus,the regulations may be judgedsuccessful if poorly designed orimproperly managed facilities are forcedto close because the risk of accidentsthey present prevents them fromobtaining insurance coverage at anaffordable price. However, if low riskfacilities that comply with all RCRAstatutory and regulatory requirementsare unable to obtain insurance coverageat a reasonable price, the liabilitycoverage regulations may meritreconsideration.

To better understand the relationshipbetween risks presented by RCRA

facilities and the availability ofinsurance, the Agency requestscomments on the following issues:

What types of firms and facilities canobtain CGL and EIL coverage? Whocannot obtain coverage at any price?What types of firms, facilities, or risksare reinsurers most hesitant to cover?Does it matter whether a facility hasinterim status or a permit? On whatbasis do insurers decide whether afacility or firm will be offered coverageand the cost of coverage? What is a"reasonable" range for premiums? Howdo these premiums compare to those setfor parallel risks (e.g., product liabilitycoverage)? How do these factors differfor different types of policy coverage?What risk assessments are requiredbefore a CGL or EIL policy will beissued for a RCRA facility? How doesthe market distinguish between disposaland nondisposal facilities for suddenand accidental coverage? Does themarket distinguish among landtreatment facilities, surfaceimpoundments, and landfills fornonsudden coverage? How does themarket distinguish among on-sitefacilities serving only the owner oroperator? How does the marketdistinguish among off-site commercialfacilities?

III. Possible Regulatory Arpoaches toPotential Probl=ns

The Agency believes that requiringinsurance or other liability coverage isdesirable to protect human health andthe environment, However, in light ofthe present and potential difficultiesencountered by some TSDF owners andoperators in obtaining insurancecoverage, the Agency is consideringtaking one or a combination of thefollowing five regulatory actions inresponse to the problem of possiblelimited insurance availability. Thesefive responses are neither exhaustivenor mutually exclusive, and the Agencyis soliciting both comments on theseapproaches and suggestions foralternative responses. The Agency willfind especially useful comments thatspecify which alternative orcombination of alternatives is preferredand why, the predicted benefits andcosts of each alternative, and the extentto which each alternative will assist theregulated community in obtainingliability coverage.A. Maintain the Existing Requirements. If the Agency does not take any action

designed to address the problem ofpossible insurance availability, then theliability requirements contained in 40CFR 264.147 and 265.147 remain in fulleffect. Owners and operators of disposal

facilities who are unable to procureinsurance or satisfy the financial test,will, under the new amendments, loseinterim status.

Of course, not all firms that areunable to procure insurance will fail tomeet the RCRA financial responsibilityrequirements; many firms will insteaddemonstrate financial responsibility bypassing the financial test specified in 40CFR 264.147 or 265.147. Some ownersand operators who are owned bycorporations that satisfy the financialtest may wish to transfer ownership oroperation to the parent corporation. Ifthe parent corporation can pass thefinancial test for the facility's financialresponsibility requirements, the facilitywould then be in compliance with theliability requirement. (A transfer ofownership or operational control shouldbe accompanied by a revised Part A).However, it is possible that somefacilities that follow environmentallysound operating procedures and are, insome sense, "insurable," maynonetheless be unable to retain interimstatus or obtain a RCRA permit, becausethe owners and operators can neitherpass the financial test nor obtaininsurance.

The Agency has adopted a short termenforcement policy in response to thedepressed state of the insurance market.The Agency will consider placing anowner or operator on a schedule ofcompliance to get insurance if: (1) TheAgency finds that providing for such aschedule is consistent with the facility'scompliance with other RCRArequirements, and (2) the facility cansubstantiate good faith attempts atsecuring insurance. Failure to exercisethe obligation to obtain insuranc6 orunsubstantiated good faith claims willresult in appropriate enforcementactions; compliance orders will beissued and penalties will be assessedwhen the owner or operator fails tomake a good faith effort in accordancewith specified criteria.

Several factors are used to definegood faith including: submittal of acomplete application to insurancecompanies in a timely fashion, allowingfor the insurance companies to processand issue the policy; submittal of anapplication to "known" suppliers of EILinsurance; submittal of evidence ofattempts to acquire insurance withknown insurers by documenting thecontracts made and the reasons givenby the insurance companies for denyingor delaying the applications

This enforcement approach wasestablished as an interim measure,pending a more detailed analysis of theissue. The policy does not apply after

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November 8, 1985, and will not (aspresently stated) affect the requirementthat interim status facilities certifycompliance with the financialresponsibility requirements as of thatdate.

B. Clarify the Required Scope ofCoverage and/or Lower the RequiredLevels of Coverage

Limited insurance availability may becaused by the unwillingness of theinsurance industry to issue policies withthe scope of coverage specified by theregulations. If this is the case, theAgency could address these concerns byclarifying the scope of coverage, and/orrevising the regulations to lower theminimum amounts of liability coveragerequired both per occurrence and on anannual aggregate basis, and/or allowmodest deductibles.

The meaning of the terms "suddenand accidental occurrences" and"nonsudden and accidentaloccurrences" could be specified in amanner that is still conducive toprotecting human health and theenvironment but also clarifies what typeof liabilities must be covered. Forexample, the term "sudden andaccidental occurrences" could bedefined to be narrower than some recentjudicial interpretations of the phrase"sudden and accidental" in CGLpolicies. However, a clarification ofterms by the Agency may not precludecontinued judicial interpretation ofpolicy coverage.

The Agency could also address theacceptability of claims-made policies,retroactive dates in claims-madepolicies, and certain exclusions (e.g.,cleanup costs, legal defense costs) inpolicies used to demonstrate liabilitycoverage. The Insurance Services Office(ISO) announced that it is consideringrewriting its new CGL form to includelegal defense costs within the policylimits. ISO is considering the changebecause of concern among both directinsurers and reinsurers over growingdefense costs associated with CGLpolicies. ISO indicated that defensecosts often exceed 30% of the cost of aclaim paid under a CGL policy. Asummary of a study conducted by theRand Corporation Institute for CivilJustice states that plaintiffs received anaverage of 37% of the total payout bydefendants after deducting plantiffs' anddefendants' litigation expenses.

EPA requires owners or operators toobtain liability coverage exclusive oflegal defense costs. This was donebecause allowing defense costs to beincluded within the policy limits mightdefense costs to be included within thepolicy limits might severely restrict the

amount of insurance coverage availableto compensate third parties. Unusuallylarge legal defense costs could result ina significant erosion in thecompensation available. This is aspecial problem for liability suits arisingout of the operation of hazardous wastemanagement facilities, as this is an areaof expanding liability involvingpotentially complex issues related tocausation and damage. However,insurers could place limits on defensecosts as long as the policies specify thatthe levels of coverage required by EPAare guaranteed before defense costs areabsorbed.

In addition, premiums could moreaccurately reflect potential liability byproviding mechanisms for apportioningcosts based on risks. For RCRAfacilities, the most effective mechanismcould involve conducting insured-specific environmental audits based onexisting scientific, engineering, andmedical data. EPA could facilitate thisapproach by providing insurers withcomprehensive technical data compiledover the past decade. This data mayserve as an actuarial basis from whichto calculate premiums related to policycoverage. EPA could also providetechnical assistance as appropriate.

This approach would provide severalbenefits. First, the insurance industrycould enter the market havingdetermined limits of liability to theirsatisfaction. Second, a source of definedcompensation to pollution victims wouldbe available through the private sector,minimizing Federal intrusion. Third,such insurance would provide aneffective market force mechanism tohelp regulate and reduce the risk ofenvironmental damage by an insuredfacility or organization by demandingresponsible environmental managementas a condition and cost or insurance.Improved operations could result fromthe incentive of lower premiums andinsurer oversight. Fourth, this approachwould consider environmental risk as acondition of financial responsibility.This consideration should lead, forexample, to RCRA permitting ofenvironmentally sound and financiallyresponsible facilities of varying size.

Lowering the minimum level ofcoverage or narrowing the scope ofcoverage may lessen the protection ofhuman health and the environment.However, since there are insurancecompanies currently writing policiesbelow the required limits for RCRA, thisoption would allow some additionalown6rs and operators to comply withthe liability requirements. The Agencysolicits comments on the appropriatelevels of coverage, how the scope ofcoverage should be defined, and the

potential effects of these changes,including the effects on the availabilityof liability coverage.

C. Authorize Other FinancialResponsibility Mechanisms

To enable more firms to meet theliability coverage required during afacility's operating life, the Agencycould revise 40 CFR 264.147 and 265.147to authorize, in addition to insuranceand financial tests, the use of thecorporate guarantee. The EPAregulations requiring financial assurancefor closure and post-closure care allowthe use of a corporate guarantee by theowner or operator's parent corporation.(See 40 CFR 24.143, 264.145, 265.143,and 265.145.) In addition, the Agencycould authorize indemnity contracts asan alternative mechanism.

The corporate guarantee is a promiseto answer for the debt or default ofanother. It is a collateral undertakingand presupposes another contract ortransaction, which is identified in theguarantee. There is ordinarily a contractor other agreement between theprincipal and a third party creating theprimary obligation and a contractbetween the principal and the guarantorcreating the guarantee, which supportsthe primary obligation. If the principaldefaults on the primary obligation, thenthe gaurantor is liable to the third partyon the obligation created by theguarantee. An indemnity contract is nota collateral undertaking, but rather atwo-party agreement that provides thatone party, the indemnitor, willreimburse the other party for losses thathe may incur because of the occurrenceof a specified event.

In the past, the Agency has notapproved the use of the corporateguarantee as an alternative mechanismfor liability coverage because of concernabout the validity and enforceability ofthe guarantee under State insurancelaws. However, if a parent (or unrelatedfirm) were allowed to provide asubsidiary (or unrelated firm) with acorporate guarantee or an indemnitycontract that would assure coverage forthird-party damages, a larger number offirms and facilities may be able tocomply with the financial responsibilityrequirements for liability coverage.

In most States, insurance is controlledunder State law, with limitations on whomay engage in the business of insuranceand detailed regulation of businesspractices. Carrying on the business ofinsurance without appropriate licensesor certificates of authority can subjectcompanies to fines or other penalties. Inaddition, corporate guarantees, such as

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those for liability coverage could befound void under State laws.

Precisely what constitutes the"business of insurance" varies fromState to State. Many States, however,either by statute or common law,exempt from their insurance regulationsactions by a firm that might otherwisebe covered by the insurance laws, ifthose actions are incidental to orconnected with other business activitiesof the firm. Thus, a corporate guaranteeor indemnity by a corporate parent to itssubsidiary that is considered to beincidental to the ownership of thesubsidiary by the parent might, in atleast some states, be exempt on thatbasis.

Another question is whether aguarantee provided by one firm toanother firm that is not a corporatesubsidiary of the guarantor would beconsidered incidental to the businessactivities of the guarantor. A singleguarantee contract for liability coverage,undertaken exclusively for profit, wouldprobably be subject to most Stateinsurance requirements. If, however, theguarantee was given to ensure that -hazardous waste management wouldcontinue td be provided to theguarantor, the guarantee might beviewed as incidental to the guarantor'sbusiness activities, and thus exemptfrom some State insurance laws.

The Agency requests comments on therelative merits and disadvantages ofallowing either the corporateguaranteeor the indemnity contract to be used asa liability coverage mechanism and ontheir respective likelihood of creating avalid and enforceable obligation underState laws. The Agency will consideramending its regulations to allow use ofthis mechanism in States where theState Attorney General certifies that thecorporate guarantee would be valid andenforceable. In addition, the Agencyrequests information on the extent towhich these alternative mechanismshave been used to demonstrate financialresponsibility under other, non RCRAprograms.

D. Authorize Waivers.

The Agency could amend itsregulations to authorize case-specificwaivers of the liability coveragerequirements if the owner or operatorcan demonstrate that it failed to obtaincoverage despite a "good faith effort.""Good faith effort" is described inoption A. The waiver would be given ona case-by-case basis and would operatefor a limited time, to be specified by theAgency (e.g. November 8, 1986). Thewaiver might be subject to otherconditions; for example, a waiver mightnot be granted to'a facility that is owned

or operated by a subsidiary of acorporation that passes the financialtest.

.This approach would promoteenvironmental protection bymaintaining the general liabilitycoverage requirements, allowing theinsurance industry additional time todevelop needed insurance policies, andallowing regulated facilities thatgenuinely attempt to comply with theregulations to continue operation. Onthe other hand, this approach may havethe disadvantage of giving firms thatobtain a waiver an unfair economicadvantage over those that purchase

-insurance, and of allowing the continuedoperation of facilities that may beunable to obtain coverage because ofthe great health and environmental risksthey pose. In addition, by decreasing thedemand for insurance,.widespread useof waivers may actually suppress thedevelopment of the needed insurancepolicies. Finally, the Agency would facea potentially heavy administrativeburden of reviewing waiver requestsand determining whether a "good faitheffort" was made.

One possible way to avoid theproblem of allowing uninsured, "high-risk" facilities to continue to operate isto grant waivers only if the owner oroperator demonstrates not only a "goodfaith effort," but also that the facility is"insurable." This approach, however,entails the additional difficulty ofdetermining which facilities are"insurable." An assessment of"insurability" may impose significantadministrative burdens on the Agencyby requiring it to perform risk analyseson the facilities of each firm that appliesfor a waiver. The Agency solicitscomments on appropriate standards for"good faith effort" and "insurable."

E. Suspend or Withdraw the LiabilityCoverage Requirements

To the extent that any limitedavailability of insurance is cause by atemporary depression in the insuranceindustry, it may be desirable to suspendby regulation the liability coveragerequirements for all firms in theregulated community. This approachwould avoid the possibility of enforcingrequirements which currently may notbe attainable. Owners and opefators of-RCRA facilities would not face potentialcitizen suits for noncompliance withregulations. Also, a suspension wouldgive the Agency, the regulatedcommunity, the insurance industry moretime to develope appropriate methods offinancial respohsibility for liabilitycoverage at RCRA facilities.

However, the approach has severaldisadvantages. Until the liability

coverage requirements are reactivated,adequate protection may not beprovided to human health and theenvironment, Currently. insured firmsmay terminate their coverage as a resultof the suspension. Furthermore, ,thelikelihood that the requiredenvironmental insurance would becomemore available at some point in thefuture remains unclear. To date, theinsurance industry and the regulatedcommunity have had several years todevelop the required liability insurance.In addition, suspending the requirementsfor liability coverage would alsosuspend much of the demand for suchinsurance, reducing incentives forcarriers to provide insurance policies forRCRA facilities. If the insurance marketfor RCRA facilities is presentlydepressed, some measure Would beneeded to determine when the markethas-recovered sufficiently to reinstatethe liability coverage requirements. TheAgency requests comments on thepresent state of the insurance marketand on whether insurers will be betterable to offer the required liabilitycoverage at some point in the nearfuture.

Finally, the Agency may considerrescinding the liability coveragerequirements permanently. The Agencysolicits comments on whether humanhealth and the environment would besufficiently protected in the absence ofthese requirements.

One obstacle to realizing practicalbenefits from this approach is that Stateregulations requiring financialresponsibility assurances analogous tothe Federal program will remain ineffect unless and until a State revises itsregulations to parallel EPA's newlyamended regulations. Absent someaction by EPA, it could be argued thatsuch State regulations would still beregarded as EPA-authorized Subtitle Crequirements even though there is nolonger a corresponding EPA Subtitle Crequirement. Thus, under this theory,facilities in authorized States wouldobtain no relief from this rulemaking.

EPA's current view is that such aresult is inconsistent with the purposesof State authorization under the statute.The general objective of section 3006 isto allow EPA to suspend itsimplementation of the RCRA program inthose States where the State's program(including its substantive standards)satisfies the statutor' and regulatoryobjectives of the RCRA program. WhereEPA reinoves a particular regulatoryrequirement from the RCRA program, itno longer makes sense for EPA to viewthe State analog to that requirement as

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part of the "RCRA authorized" Stateprogram.

Accordingly, if EPA suspends thefinancial responsibility requirements,EPA would also modify its regulations toindicate that the State's analog to thoserequirements would no longer be RCRArequirements. It is important to note,however, that the State regulationsremain valid requirements enforceableby the State even though they would nolonger be Subtitle C requirements.Under section 3009 and 40 CFR 271.1(i)and 271.1(ii), authorized States areallowed to impose more stringentrequirements than EPA. Consequently,while EPA would no longer have theauthority to enforce the stateregulations, the State would remain freeto enforce its own law.

Such a modification of the scope ofthe RCRA State program, would have adirect impact on the responsibilities ofowners and operators under section3005(e)(2)(B) to certify compliance withthe "applicable financial responsibilityrequirements." If State law analogous tothe Federal insurance requirements havebeen removed from the RCRA State

program, then they are no longer theapplicable requirements for purposes ofthe certification responsibilities.

IV. Executive Order 12291

This regulation was submitted to theOffice of Management and Budget forreview as required by Executive Order12291. The regulatory amendments beingconsidered today to the liabilityrequirements are not "major rules". Theoptions under consideration are notlikely to result in a signficant increase incosts and thus are not a major rule, noRegulatory Impact Analysis has beenprepared.

V. Paperwork Reduction Act

There are no information collectionrequirements associated with this rule.

VI. Regulatory Flexibility Act

Under the Regulatory Flexibility Actof 1980 (5 U.S.C. 601 et seq.), Federalagencies must, in developingregulations, analyze their impact onsmall entities (small businesses, smallgovernment jurisdictions, and smallorganizations). The options under

consideration either maintain theexisting regulations and thereby imposeno additional costs, or relax the existinginsurance requirements and thus reducecosts associated with compliance.

List of Subjects

40 CFR Part 264

Hazardous waste, Insurance,Packaging and containers, Reportingand recordkeeping requirements,Security measures, Surety bonds.

40 CFR Part 265Hazardous waste, Insurance,

Packaging and containers, Reportingand recordkeeping requirements,Security measures, Surety bonds, Watersupply.

Accordingly, I certify that thisproposed regulation will not have asignificant impact on a substantialnumber of small entities.

Dated: August 16, 1985.Lee M. Thomas,Administrator.[FR Doc. 85-20108 Filed 8-20-85; 8:45 am]BILLING CODE 6560-50-M

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Documents

33902 Federal Register No. 162 Proposed Rulesfacility operations (47 FR 16554). Under the liability coverage regulations (40 CFR 264.147 and 265.147), owners and operators of all types