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53 FR 43322-43383 Wednesday, Oct. 26, 1988 40 CFR Parts 280 and 281, Underground Storage Tanks Containing Petroleum-Financial Responsibility Requirements and State Program Approval Objective; Final Rule--Preamble Section III. Section-by-Section Analysis

PREAMBLE
40 CFR Parts 280 and 281
(pp. 43326-43362)


III. Section-by-Section Analysis

A. Applicability (§280.90)

1. Owners and Operators

2. Tanks Taken Out of Operation Before the Date for Compliance (§280.90(b))

3. Applicability to State and Federal Government Entities (§280.90(c))

4. Applicability to Local Government Entities

5. Applicability to Indian Tribes

6. Deferrals and Exclusions (§28.90(d))

B. Compliance Dates (§280.91)

C. Definition of Terms (§280.92)

1. Accidental Release and Occurrence

2. Bodily Injury

3. Director of the Implementing Agency

4. Petroleum Marketing Facilities

5. Petroleum Marketing Firms

6. Property Damage

7. Additional Definitions

D. Amount and Scope of Required Financial Responsibility (§280.93)

1. Per-Occurrence Amount

2. Aggregate Amounts

3. Apportionment of Costs and Levels of Coverage Under Separate Mechanisms

E. Allowable Mechanisms and Combinations (§280.94)

1. Mechanisms Allowed

2. Combinations of Mechanisms

3. Attorney General Certification (§280.94(b))

4. New Mechanisms

5. Specification of Tanks in Financial Assurance Instruments

F. Financial Test of Self-Insurance (§280.95)

1. Proposed Financial Test

2. Comments on the Proposed Financial Test

3. Summary of Changes in the Financial Test

G. Guarantee (§280.96) and Indemnity Contract

H. Insurance and Risk Retention Group Coverage (§280.97)

1. Availability

2. Insurance Cost and Its Impact

3. Viability of Risk Retention Groups

4. Specific Requirements for Insurance and Risk Retention Group Coverage

I. Surety Bond (§280.98)

J. Letter of Credit (§280.99)

K. Use of State-Required Mechanisms (§280.100)

L. State Fund or Other State Assurance (§280.101)

M. Trust Fund (§280.102)

N. Standby Trust Fund (§280.103)

O. Substitution of Financial Assurance Mechanisms by an Owner or Operator (§280.104)

P. Cancellation or Nonrenewal by a Provider of Financial Assurance (§280.105)

1. Length of Notice Period

2. Termination for Non-Payment of Premium

Q. Reporting by Owner or Operator (§280.106)

R. Recordkeeping (§280.107)

S. Drawing on Financial Assurance Mechanisms (§280.108)

T. Release from the Requirements (§280.109)

U. Bankruptcy or Other Incapacity of Owner or Operator or Provider of Financial Assurance (§280.110)

V. Provisions Pertaining to Other Instruments (§280.111)

1. Maintaining Other Instruments at Required Levels of Coverage

2. Exclusionary Language for Other Instruments

W. Suspension of Enforcement (§280.112)

1. Statutory Authority

2. Suspension of Enforcement Process


III. Section-by-Section Analysis

A. Applicability (§280.90)

The rule promulgated today applies to owners and operators of all underground storage tank systems containing petroleum, with certain exemptions or deferrals. Commenters raised several issues concerning the applicability of this rule.

1. Owners and Operators (§280.90(a)).

The final rule applies to owners and operators of all petroleum UST systems (as defined in §280.12 of the technical standards rule). If the owner and operator are separate persons, only one person is required to demonstrate financial responsibility although the Agency will hold each responsible if the financial responsibility requirements are not complied with by either party. While the Agency's intention with respect to this issue was explicitly stated in the preamble to the proposed rule (52 FR 12795, April 17, 1987), the rule also conveyed the Agency's intention by using the phrase "owner or operator" instead of "owner and operator" in all but the applicability section.

The Agency retains this approach and explicitly states it in the rule, as well as in the preamble, to avoid possible confusion. For this reason, the Agency has added the following language to §280.90 Applicability:

If the owner and operator of a petroleum UST system are separate persons, only one person is required to demonstrate financial responsibility.

Some commenters supported the Agency's approach to applicability when the owners and operators are separate persons; however, other commenters believed that EPA should designate which person should comply with the rules. Of these commenters, some supported a rule that required only the owners to comply with the requirements while other commenters believed only operators should be held responsible. Some commenters suggested that the person with responsibility for a particular activity, e.g. tank installation, maintenance or daily operation, should demonstrate financial responsibility.

The commenters who urged EPA to designate only one responsible person when the owners and operators are separate persons believed that the proposal left owners and operators to "fight it out" to determine who will demonstrate financial responsibility and that problems would occur when they do not agree who should obtain coverage. The commenters who urged EPA to hold only operators responsible pointed out that in many cases owners will have only minimal or nominal control over the operation of the tanks (e.g., passive lessors of property such as oil jobbers or marketers ordinarily do not control day-to-day tank operations). On the other hand, one commenter who supported holding only owners responsible pointed out that, when oil jobbers and marketers own tanks, they have usually assumed responsibility for tank replacement and maintenance.

The Agency has decided not to designate a single party, either the owner or operator, as responsible for compliance with the rules because the statute requires the UST standards to be applicable to "all owners and operators," and a determination of which person should assume these costs could only be made on a case by case basis. Under the technical requirements, both persons are responsible for corrective action; however, the liability of owners and operators to third-party claimants will vary depending on the circumstances of each case and on the applicable state law. Making financial assurance the responsibility of only the person engaged in a particular activity would also be inappropriate because the liability of an owner or operator is not limited to the results of particular activities. In some cases the person responsible for one activity may have allowed a release to occur and therefore incur liability to third parties, while in another case, the person responsible for a different activity may be liable. Under theories of strict liability and negligence, even passive lessors could be liable for third-party damages in some situations. Moreover, the person responsible for maintenance and installation will vary depending on the individual arrangements between owner and operator.

The Agency recognizes that in some instances owners and operators will have difficulty agreeing which one of them will comply with the rules. Nonetheless, the Agency believes that owners and operators are in the best position to decide between themselves, as part of their ongoing business relationships, which one of them should demonstrate financial responsibility. Owners and operators may decide that the person most responsible for particular activities should obtain financial assurance, or they may decide that the person most able to demonstrate financial responsibility should do so. EPA believes this approach will allow for greater flexibility, yet avoids the considerable expense of requiring both parties to secure financial assurance.

Other commenters expressed concern about other applicability issues. Some commenters objected to requiring current owners and operators to obtain financial assurance when past owners and operators might be responsible for contamination. Another commenter pointed out that tank testers may be responsible for releases and urged that they should be subject to financial responsibility requirements.

Current owners and operators are responsible under the regulation for obtaining financial assurances for their tanks even if previous owners or operators are responsible for contamination. In situations where a current owner or operator is faced with claims for contamination that occurred under a previous owner or operator, he may pursue appropriate legal remedies against the previous owner or operator. Similarly, damage to tanks and releases which result from tank testing activity are subject to tort claims under applicable state law. Moreover, the statute does not authorize the imposition of financial responsibility requirements on tank testers, only UST owners and operators.

Finally, one commenter requested that the Agency clearly define owners and operators to exclude corporate parents or affiliates. Parents and affiliates generally would not be subject to today's rule. Parents, for example, may serve as guarantors for owners and operators, thereby enabling the owner or operator to satisfy financial responsibility requirements, but would not be directly responsible themselves for complying with these requirements. The Agency might, however, hold parents or affiliates subject to these requirements in certain situations. For example, if an owner or operator attempted to circumvent today's requirements through the creation of a sham subsidiary or through other arrangements, the Agency could in appropriate circumstances hold a parent or affiliate responsible for compliance with these rules. Thus, a definition of owners and operators which excludes corporate parents or affiliates in all situations is not appropriate. The Agency does not expect, however, that parents or affiliates will generally be subject to these financial responsibility requirements.

2. Tanks Taken Out of Operation Before the Date for Compliance (§280.90(b)).

The preamble to the proposed rule stated EPA's intention to make the rule applicable to tanks taken out of operation before the effective date of the rule. The language of the proposed rule, however, did not state specifically that it would apply to such tanks.

The Agency received a number of comments on this provision. One commenter questioned the Agency's authority under Subtitle I to apply financial responsibility requirements retroactively to owners of tanks taken out of operation before Subtitle I was enacted in 1984.

The statutory definition of "owner" in RCRA Section 9001(3)(A) and (B) includes owners of tanks taken out of operation before enactment of HSWA, as well as owners of tanks in use on the date of enactment. RCRA Section 9003(a) further authorizes EPA to promulgate regulations, including financial responsibility regulations, applicable to all owners and operators of USTs. Therefore, the Agency has authority to regulate tanks taken out of operation before the enactment of Subtitle I and to impose financial responsibility requirements on owners and operators of such tanks where necessary to protect human health or the environment.

Some commenters, while not questioning the Agency's statutory authority, urged the Agency to exempt tanks taken out of operation before the effective date of the rule or before November 8, 1985 (one year after enactment of HSWA). Commenters gave the following reasons for such an exemption:

- Providers of financial assurance are not likely to offer assurance for tanks taken out of operation unless it can be proven that there is no contamination present.

- Because so many tanks have been taken out of operation in recent years, it would be extremely difficult to identify these tanks and inform former owners and operators of their obligations.

One commenter recommended that if the requirement for such tanks is retained, owners and operators of tanks that are properly closed should not be required to maintain financial assurance if they can demonstrate that no contamination is present.

At the time the Agency proposed to require owners or operators of tanks taken out of operation before the effective date to obtain financial assurance, it also proposed in the technical rule to require these tanks to comply with closure requirements (§280.80). The Agency reasoned that, because non-operational tanks were subject to the closure and corrective action requirements under Subparts F and H of the technical standards, requiring financial assurance was necessary to ensure that closure was undertaken properly and quickly.

Since that time, the Agency has decided to eliminate the requirement that all USTs taken out of operation before the effective date for the technical rule undergo closure. The rule does provide, however, that implementing agencies may require owners or operators to close these tanks properly if there is a reason to believe that they may pose a threat to human health and the environment. The preamble to the technical standards rule discusses the reasons for this change.

Based on comments on the proposed financial responsibility rule and the revisions to the technical standards, the Agency has decided not to require owners or operators of USTs taken out of operation before the compliance dates in this rule to obtain financial assurance. The Agency recognizes that for many owners and operators of USTs, insurance will be the only feasible financial assurance mechanism available. The Agency agrees with commenters, among them insurance companies, that insurance providers would be extremely reluctant to assure tanks taken out of operation because of the perceived greater uncertainty associated with them.

Even if providers of assurance would assure these tanks, it is unlikely that they would cover leaks which occurred before the effective date of the policy. For example, based on standard insurance industry practice, owners and operators applying for coverage must meet certain pre-conditions which may include tank tightness testing and a determination that there are no existing releases. If releases are discovered, insurance policies probably would not cover them, because the insurance industry's practice is to exclude pre-existing releases from coverage. In addition, as a condition for coverage of a tank not in operation, an insurer might require proper closure in order to minimize the risk of a release of material which might remain in the tank. Such an insurance policy would be of little value in protecting human health and the environment since it would not cover pre-existing conditions and would only cover tanks that have been emptied of their contents. The Agency believes that the owners' and operators' resources would be better spent in closure and corrective action than in attempting to procure this type of insurance. Nevertheless, owners and operators of tanks taken out of operation before the effective date remain responsible for the costs of releases associated with them.

3. Applicability to State and Federal Government Entities (§280.90(c)).

The final rule, like the proposed rule, is not applicable to state and federal government entities whose debts and liabilities are the debts and liabilities of a state or the United States. Several commenters argued that state and federal government entities should not be exempt from the financial responsibility requirements. Their reasons included the following:

- Such an exemption conflicts with Congressional intent to have all tanks assured.

- The exemption will discourage sound tank management practices on the part of state and Federal governments.

- The exemption would provide state-owned transit agencies with unfair advantages over private owners.

The Agency does not interpret the Congressional intent of Subtitle I to preclude exempting any class of USTs from otherwise applicable requirements when the Agency has determined that such requirements are not necessary to protect human health or the environment. See RCRA section 9003(a). With respect to financial responsibility, such requirements need not be imposed where the owners or operators will consistently be able to cover the costs of releases in a timely fashion. The purpose of these financial responsibility requirements is to ensure that funds will be available in a timely manner to cover the costs of corrective action and compensation of third parties arising from UST releases. While the Agency recognizes that these requirements may provide an incentive for sound tank management practices, this is not their primary purpose.

No commenters disputed the Agency's opinion that Federal and state governments have the requisite financial strength and stability to fulfill their financial assurance obligations. In addition, exemption from the requirements will not discourage sound tank management practices by state and federal government entities, because they remain responsible for the cost of corrective action associated with the releases.

The Agency concedes that not having to pay the costs of procuring a financial assurance mechanism may result in a slight competitive advantage for state-owned transit agencies. Such an advantage is not likely to be significantly greater than advantages already enjoyed by state-owned transit systems (e.g., through government subsidies). In addition, the financial advantage of the state-owned agency is comparable to the position of any firm which can rely on a guarantee provided by a parent or related firm, and merely reflects the difference between large and small businesses. If releases occur, state-owned agencies may rely on state assistance to pay the costs of damages. Privately-owned transit agencies, however, would have to rely on their own funds to pay these costs. Thus, even without today's rule, private transit agencies have a financial incentive to purchase insurance coverage not shared by the state-owned agency.

4. Applicability to Local Government Entities

While the proposed rule exempted from the requirements those government entities whose debts and liabilities are the debts and liabilities of federal or state governments, local government entities were required to provide financial assurance for USTs that they own or operate. The final rule remains applicable to local government entities. However, under the Agency's schedule for phased compliance with the rule, local government entities have 24 months from the promulgation date to comply. EPA also intends to develop a financial test in the interim that will allow local governments that can demonstrate the requisite financial strength and stability to cover the costs associated with UST releases to self-insure.

Local government entities include both general purpose local governments and special purpose local entities. General purpose local government entities include municipalities, counties, townships, towns, villages, parishes and New England towns. Special purpose local governments perform a single function or a limited range of functions. Special purpose governments are generally designated as either public authorities or special districts such as school districts, water and sewer authorities, transit authorities or power authorities. All local governments, both general and special purpose, are subject to this rule.

One commenter supported application of the financial responsibility requirements to local government entities. However, many commenters stated that the proposed exemption for federal and state governments from demonstration of financial responsibility should be extended to local government entities. The major arguments in favor of such an exemption focused on three areas: (1) the permanence and stability of local governments; (2) the incentives for local governments to provide funds in a timely manner; and (3) the financial strength and capability to raise funds in a timely manner.

First, several commenters maintained that the permanence and stability that the Agency attributes to Federal and state governments also apply to local governments; local governments are unalterably attached to their particular location. Moreover, commenters asserted that cities almost never go bankrupt, and when they are unable to meet their financial obligations over the short-term, their debts are not forgiven under the bankruptcy laws but are extended until they can be satisfied. Therefore, unlike private firms, local governments do not disappear even if they file bankruptcy.

Second, commenters stated that local governments have the same incentives as federal and state governments to meet their UST obligations in a timely manner. Local governments exist to safeguard public health and welfare, and local officials have voter accountability that helps assure an immediate and effective response to an UST release. One commenter, an association of city governments, stated that cities have consistently demonstrated an ability to respond to UST leaks in a timely manner and have taken prompt action to ensure that leaks do not recur in the future by either upgrading or removing failed USTs.

Third, commenters claimed that local governments have the requisite financial strength to meet potential UST obligations in a timely manner. One commenter representing city governments pointed out that cities are accustomed to addressing emergencies such as natural disasters and routinely establish contingency funds of a size that could easily cover the costs associated with most UST leaks. Another commenter noted that local appropriation procedures often are structured so that officials may take funds originally intended for one purpose and divert them to a more pressing need related to USTs.

Finally, one commenter argued that for UST releases in excess of fund reserves, many local government entities -- like states -- have the ability to raise funds through taxes and debt issues. The commenter stated that the delays involved with tax and bond initiatives are unlikely to affect the timeliness of an UST cleanup because cities tend to be excellent credit risks and can often have contracted work performed in an emergency without having to provide funds until after the emergency is remedied or use their own personnel to respond.

The Agency believes that there is merit in many of the points commenters raised as applied to particular municipalities. However, for several reasons, the Agency is unwilling to exempt all local government entities from these requirements. There is substantial variability in local governments in terms of size, financial capacity, and functions. A number of commenters urged that the financial test should be modified so that local government entities could use it. The corporate financial test is not applicable to most government entities because it contains a net worth indicator, a financial measure that is either unavailable to many local governments or does not measure financial strength in the same way it does for private firms. It requires reporting to the U.S. Securities and Exchange Commission (SEC) or to Dun and Bradstreet, which is also not applicable to government entities. Accordingly, the Agency is taking steps to develop a financial test that will allow local governments meeting the test criteria to self-insure like private companies that use the corporate financial test. Local governments which pass this financial test will not be required to obtain other financial assurance mechanisms to comply with the requirements of this rule. In the interim as discussed in Section III.B, under the phased schedule of compliance, the compliance date for local government entities is 24 months after promulgation. The Agency anticipates that the final financial test for local government entities will be promulgated before their scheduled compliance date.

Some commenters on the proposed rule suggested that particular special purpose local governments such as public power entities or airports should be exempt from the financial responsibility requirements. The Agency sees no reason to treat particular special purpose local government entities differently from all other local governments. All local governments remain subject to the rule and may be able to meet the local government financial test under development.

Some commenters suggested a change to the corporate financial test so that power authorities meeting the other criteria in the test could use it. Specifically, they suggested that the Agency accept reports to the Rural Electrification Administration and the Energy Information Administration, as an alternative to filing with the SEC or Dun and Bradstreet. Their comments indicated that other than filing annual statements with a different Agency, they could use the Subtitle I corporate financial test. This change has been made to the corporate financial test so that power authorities meeting the criteria in the test may use it.

5. Applicability to Indian Tribes

The proposed rule did not address the applicability of the financial responsibility requirements to Indian tribes. Indian tribes are included in the statutory definition of municipalities in RCRA Section 1004(13). Accordingly, under the phased schedule of compliance, Indian tribes will be required to comply with financial responsibility requirements on the last compliance date, 24 months after the promulgation date of the rule, similar to municipalities. However, in the proposed financial test for local government entities, the Agency will specifically request comments on whether this test should apply to Indian tribes. The Agency intends to finalize this proposed rule before the compliance date for local government entities and Indian tribes.

6. Deferrals and Exclusions (§280.90(d))

Under the proposed rule, EPA would have deferred from the financial responsibility requirements certain categories of tanks that the Agency also was proposing to defer under the technical requirements. The Agency proposed to defer the regulation of these categories of USTs because it had limited information about these USTs or was otherwise uncertain about the need to regulate them. Several commenters addressed these and other categories of tanks that they believed should be deferred or exempted from the final rule.

The proposed technical requirements deferred the following categories of tanks from all of their requirements (except the requirements for corrective action and notification and the prohibition of bare steel UST installation requirements): (1) Wastewater treatment tanks, (2) sumps, (3) underground bulk storage tanks, (4) USTs containing radioactive waste and other radioactive materials, (5) UST systems containing electrical equipment, (6) hydraulic lift tanks, and (7) UST systems containing used oil.

In the final technical standards rule (53 FR 37082, September 23, 1988), the Agency has excluded some of these categories of USTs from the technical requirements. Some of the other categories of USTs that the Agency proposed to defer from regulation are now regulated. The Agency continues to defer regulating certain categories of USTs (except from corrective action requirements and prohibition of bare steel UST installation).

The financial responsibility rule tracks the final technical standards rule with respect to exclusions and deferrals from the requirements. All USTs excluded from regulation are excluded from these financial responsibility requirements. All USTs that are deferred from regulation also are not subject to these financial responsibility requirements. Because the Agency is uncertain about the need to regulate deferred categories of USTs, or has limited information about them, the application of financial responsibility requirements to the deferred categories of USTs is inappropriate at this point. The Agency's decision about the regulation of each of the categories of excluded or deferred tanks is summarized below. The preamble to the final technical standards rule contains a thorough discussion of the Agency's rationale for each decision.

- UST Systems Containing Hazardous Waste and Regulated Substances. The Agency has excluded these tank systems from regulation under Subtitle I.

- UST Systems Containing Electrical Equipment and Hydraulic Lifts. Equipment or machinery using regulated substances for operational purposes are now excluded from regulation.

- Wastewater Treatment USTs. Wastewater treatment tanks regulated under the Clean Water Act are excluded from regulation. Wastewater treatment USTs that are not regulated under the Clean Water Act are deferred from regulation.

- Tanks Containing De Minimis Quantities of Regulated Substances. The Agency is excluding the following categories of USTs:

-- USTs with a capacity of less than 110 gallons;

-- USTs holding a de minimis concentration of regulated substances; and

-- USTs that serve as emergency backup tanks, hold regulated substances for only a short period of time, and are expeditiously emptied after use.

- Sumps. Sumps are not excluded or deferred as a separate category; however, many sumps may be excluded under the de minimis exclusions, the wastewater treatment exclusion, and the statutory exclusion for storm water and wastewater collection systems. Other sumps may be deferred under the "field-constructed tank" deferral.

- Field-Constructed Tanks. Field-constructed tanks, which include many tanks that were classified as underground bulk storage tanks in the proposal, are deferred from regulation.

- UST Systems that Contain Radioactive Wastes and Other Radioactive Materials. The Agency is deferring UST systems that contain radioactive materials from regulation.

- Backup Diesel Tanks at Nuclear Facilities. These USTs are deferred from regulation.

- Airport Hydrant Fueling Systems. These USTs are deferred from regulation.

- Used Oil. Tanks containing used oil, including crankcase oil, are no longer deferred. They are now subject to the final technical rule, and are also subject to the financial responsibility requirement.

For each of the following categories of tanks, the Agency received comments supporting a deferral or exemption of these requirements from the financial responsibility requirements (see also the preamble to the technical standards rule for a more thorough discussion):

- Small Capacity Tanks. One commenter urged "special consideration" for small capacity users. One commenter suggested that petroleum USTs containing under 5,000 gallons should be exempt. Another commenter suggested 4,000 gallons as a cutoff. As noted above, the Agency has decided on a de minimis exclusion for tanks with a capacity of less than 110 gallons.

- Small Business. One commenter requested a small business cutoff for the final rules because insurance may be offered only at unaffordable rates. Other commenters requested an exemption for small businesses not engaged in petroleum marketing. The Agency has not exempted small businesses from the final financial responsibility requirements because the costs of corrective action and third-party claims will not be different for small businesses than for other owners and operators. The specific concerns of small businesses and businesses not engaged in petroleum marketing are addressed in establishing a phased compliance schedule (Section III.B in the preamble) and a lower per- occurrence amount for certain facilities not engaged in petroleum production, refining or marketing (Section III.D.1).

- Tanks Containing Heating Oil. Based on experience with releases in New Jersey, one commenter urged that heating oil for on-site consumption should not be excluded from the requirements. Because heating oil tanks are excluded from regulation by statute, EPA cannot require these USTs to obtain coverage.

- Small Throughput Tanks. One commenter supported exempting a system with small throughput volume. According to this commenter, this exemption is appropriate because most leaks are associated with piping. The Agency recognizes that a large number of releases are associated with piping; however, the Agency does not believe an exclusion for these tanks is appropriate. Releases may still occur from tanks with small throughput and owners or operators should obtain coverage for releases that do occur. However, the Agency has taken these concerns into account in establishing a lower per-occurrence amount of financial assurance for tanks at certain facilities not engaged in petroleum production, refining or marketing.

- Tanks Owned by Small, Rural Telephone Systems. One commenter urged EPA to consider exempting small, rural telephone systems from these requirements for the following reasons: (1) the unavailability of pollution insurance, (2) the high net worth requirement for self-insurance, and (3) the high per-occurrence and aggregate coverage levels. Although EPA recognizes owners and operators of these USTs may have difficulty obtaining financial assurances, releases from these USTs may still require corrective action and cause bodily injury and property damage to third-party claimants. For these reasons, EPA has not exempted these categories of USTs.

- Aircraft Owners. One commenter supported an exemption for aircraft owners, comparing these USTs to motor fuel tanks with a capacity less than 110 gallons. All tanks with a capacity of less than 110 gallons are now excluded from these requirements. Thus, many aircraft owners with USTs that contain a capacity of less than 110 gallons are excluded under the de minimis exclusion. In addition, EPA has deferred regulation of airport hydrant systems. The Agency is not aware of any evidence to support an additional exemption for these categories of USTs that contain more than 110 gallons.

B. Compliance Dates (§280.91)

Today's rule is effective on January 24,1988. However, UST owners are required to comply with this regulation by the date assigned to their appropriate compliance category in the rule. The composition of the compliance categories and the compliance dates for each of these categories is summarized in Table 1. As Table 1 shows, EPA has designated UST ownership as the factor determining compliance categories. The rationale for this decision is explained below.

UST owners in Category I are required to comply on the effective date three months after the rule's promulgation. UST owners in Category I include all petroleum marketing firms that own 1,000 or more USTs and all other UST-owning entities that report a tangible net worth of $20 million or more to the SEC, Dun and Bradstreet, the Energy Information Administration, or the Rural Electrification Administration.

UST owners in Category II are required to comply by 12 months after the rule's promulgation date. UST owners in Category II include all petroleum marketing firms owning 100 to 999 USTs.

UST owners in Category III are required to comply by 18 months after the rule's promulgation date. UST owners in Category III include all petroleum marketing firms owning 13 to 99 USTs at more than one facility.

UST owners in Category IV are required to comply by 24 months after the rule's promulgation date. UST owners in Category IV include all petroleum marketing firms owning 1-12 USTs or those owning only one facility with fewer than 100 USTs. (For example, a petroleum marketing firm owning 13 USTs at one facility would be classified by EPA in Category IV.) Category IV also includes all UST-owning firms not engaged in petroleum marketing but having tangible net worth of less than $20 million and all local government entities.

In §280.92 of the final rule, the Agency defines petroleum marketing firms as all firms owning facilities engaged in petroleum production, refining, or marketing. These include all facilities at which petroleum is produced and all facilities from which petroleum is sold or transferred to other petroleum marketers or to the public. Petroleum production facilities include all refineries and all facilities engaged in producing petroleum products from purchased materials. Facilities from which petroleum is sold or transferred to other petroleum marketers or to the public include all wholesale petroleum marketers facilities, such as bulk terminals and bulk plants, and all retail petroleum marketing facilities, such asautomobile service stations, marine service stations, truck stops, convenience stores selling gasoline, etc. The Agency considers all facilities selling petroleum products to the public to be retail petroleum marketing facilities, even if the amount of petroleum sold is minimal. Facilities that store petroleum products in underground storage tanks only to refuel their own vehicles (e.g., establishments owning fleets of vehicles) are not considered facilities that are engaged in petroleum marketing. Establishments that store fuel to refuel vehicles rented to the public (e.g., rental car facilities) are not considered facilities engaged in petroleum marketing as long as the fuel is not sold to the public at large.

Table 1. Compliance Dates for and Composition of Compliance Categories

Category and compliance date for this category

Composition of category

Petroleum marketing firms

Nonpetroleum marketing firms

I. 3 months after promulgation date of rule, on the effective date. All petroleum marketing firms owning 1,000 or more USTs

All UST-owning non-petroleum marketing firms that report a tangible net worth of $20 million or more to the SEC, Dun and Bradstreet, the Energy Information Administration, or the Rural Electrification Administration.

II. 12 months after promulgation date of rule...

All petroleum marketing firms owning 100-999 USTs None.

III. 18 months after promulgation date of rule...

All petroleum firms owning 13-99 USTs at more than one facility.

Do.
IV. 24 months after promulgation date of rule... All petroleum firms owning 1-12 USTs or owning only one facility with fewer than 100 USTs All UST-owning non-petroleum marketing firms that do not report a tangible net worth of $20 million or more to the SEC, Dun and Bradstreet, the Energy Information Administration, or the Rural Electrification Administration, including all local government entities.

The Agency considers firms owning both petroleum marketing facilities and other types of facilities that are not engaged in petroleum marketing to be petroleum marketing firms. The compliance date for such firms is based on the total number of USTs owned at their petroleum marketing facilities and at their other facilities.

Many commenters on EPA's proposed rules suggested that the Agency delay the effective date of the rule because pollution liability insurance for USTs and other financial assurance mechanisms would not be available to a large number of UST owners and operators by the rule's effective date. Although EPA has decided not to delay the effective date of this rule, the Agency is concerned about the unavailability of financial assurance mechanisms for a large portion of the regulated community. On March 31, 1988, EPA published a supplement to the proposed rule (53 FR 10401) in which the Agency explained that it was considering a phase-in of the financial responsibility regulations to allow different categories of owners and operators to come into compliance at different times after publication of the final rules. The principal reason for the phase-in was to provide sufficient time for owners and operators to obtain financial assurance in accordance with the rules. Additional reasons for the proposed phase-in included:

- The time necessary for providers of financial assurance mechanisms to conform them to EPA's requirements;

- The time necessary to provide assistance and outreach programs for portions of the regulated community;

- The administrative difficulties of trying to implement this regulation for such a large and diverse regulated community; and

- The unavailability of mechanisms to large portions of the regulated community.

The Agency received a large number of comments in response to this notice. Although the majority of commenters generally agreed with the phase-in strategy, many suggested an across-the-board delay and still others were concerned about the possible negative consequences of any type of delay (including a phase-in) to the implementation of the financial responsibility rules. The Agency agrees with many commenters who pointed out that the relative unavailability of financial responsibility mechanisms (primarily insurance, the financial test of self-insurance, or state funds) presents a problem for some members of the regulated community and that a phase-in may help to alleviate this problem. However, the Agency recognizes that the problem of the unavailability of mechanisms for some members of the regulated community may not be resolved before the compliance date for the requirements for those owners. The Agency retains its discretion to use the suspension of enforcement authority provided in section 9003(d)(5)(D) to address the problem of unavailability in the future. EPA expects that implementation of the rule during the phase-in period will enable the Agency to develop appropriate suspension of enforcement procedures based on this experience tailored to the numbers and types of facilities for which assurance remains unavailable.

Many commenters opposed a phase-in or any type of delay in the implementation of these rules. Their arguments included:

- Delaying implementation of financial responsibility rules will not increase the availability of insurance and may even further delay any response from the insurance marketplace.

- Delaying the implementation of financial responsibility rules removes a strong incentive to replace or upgrade substandard USTs quickly.

- Delaying implementation of the financial responsibility rules may delay the establishment of state funds.

- Delaying implementation of the financial responsibility rules will not eliminate the need for regulated entities to apply for a suspension of enforcement.

In deciding that a phase-in is the best regulatory strategy, the Agency has attempted to establish compliance dates which are as early as possible considering the type of assurance different types of facilities are likely to obtain. The use of an approach involving different compliance dates for different compliance categories is designed to achieve the maximum balance between the need to ensure financial capability for UST releases and the necessary time for owners and operators to obtain assurance mechanisms. For example, EPA believes that almost all firms in Category I will be able to comply with these requirements using the financial test of self-insurance or a guarantee. Chapter 2 of an EPA-sponsored study, entitled "Financial Responsibility for Underground Storage Tank Releases: Financial Profile of Retail Motor Fuel Marketing Firms," shows that all but one of the firms for whom data were collected that own 1,000 or more USTs (assuming that there are 4.1 USTs per outlet) have over $20 million in tangible net worth. Firms in other industry sectors with at least $20 million in tangible net worth will be able to pass the financial test of self-insurance as long as they file financial statements with the SEC, the Energy Information Administration, or the Rural Electrification Administration, or they report their tangible net worth to Dun and Bradstreet and Dun and Bradstreet assigns them a financial strength rating of 4A or 5A. The Agency sees no reason why such firms should not be required to comply with this regulation by the effective date of the requirements.

Further, almost all firms in Category II either have insurance now or can buy it from providers already in the marketplace, on the condition that they upgrade their tanks to meet insurers' criteria. These firms have 12 months from the promulgation date to apply for insurance and to upgrade their tanks. This period also gives insurance providers time to conform their pollution liability or environmental impairment policies to EPA's regulatory requirements and to raise the necessary capital or reinsurance to offer the limits of liability required in today's rules.

The Agency recognizes that the smaller petroleum marketing firms in Category III are less likely than firms in Category II to have insurance and therefore need additional time for processing of their insurance applications and upgrading their USTs to meet insurers' requirements. These firms have 18 months from the promulgation date to comply with the regulations.

The Agency expects that regulated entities in Category IV (which includes the smallest petroleum marketing firms, general industry firms with tangible net worth under $20 million, local government entities, etc.) will have the most difficulty obtaining financial assurance. Most of these entities cannot pass the financial test of self-insurance included in today's rule, and pollution liability insurance has not generally been available to them. EPA expects that the majority of these regulated entities will have to rely on state funds for assurance. Many commenters responding to the Supplemental Notice (53 FR 10401) stressed that EPA's estimate of 18 months for state funds to form was overly optimistic. Today's rule would give those entities relying on a state fund for financial assurance 24 months from the rule's promulgation date to come into compliance.

In the absence of a phase-in, the Agency does not believe that most entities in the regulated community would have adequate time to comply with the financial responsibility regulations, because only the self-insurance mechanism can be implemented immediately by those firms able to use it. Those firms able to use insurance will probably not be able to comply by the effective date of the regulations. Even those firms that already have UST pollution liability policies probably do not have policies that conform to EPA's requirements or that have sufficient limits of liability. These policies will have to be changed or augmented to comply with today's financial responsibility regulation.

It will be even more difficult for those firms that may be able to obtain insurance but have not yet done so to comply by the effective date of the regulations. One current insurer of USTs commented that some type of phase-in is "imperative" because the administrative capacity of UST insurers is not sufficient to accommodate all tank owners and operators who want to purchase insurance. In addition, most of the pollution liability insurance currently being offered to petroleum marketers contains preconditions with respect to the age of the USTs insured and leak detection methods. Firms with older USTs or inadequate leak detection methods will need time to comply with these insurer requirements. It would be impossible for all firms not already meeting these requirements to comply with them by the effective date of the regulations. Finally, as pointed out by many commenters, the development of state funds can take a considerable amount of time. Thus, the Agency concludes that it would be impossible for most of the regulated community to comply with today's financial responsibility requirements within 90 days of the promulgation of the regulations.

At the same time, the discretionary authority to suspend enforcement of the rules is not an adequate substitute for the phase-in because suspension does not serve the same purpose as a phase-in. The Agency believes that human health and the environment will be better protected by establishing reasonable compliance dates than by requiring large portions of the regulated community to devote their immediate compliance efforts to petitioning for a suspension of enforcement. During the phase-in period, the resources of the regulated community can be devoted to obtaining financial assurance mechanisms, and the resources of the states, EPA, and the regulated community can be devoted to developing and encouraging the development of mechanisms such as state funds and RRGs. Inclusion of a phase-in will restrict the use of the suspension of enforcement mechanism to those situations where compliance difficulties have to do with things other than inadequate time to complete administrative activities and to meet insurers' preconditions.

The Agency also does not believe that deferral of the requirements is a useful substitute for a phase-in. A phase-in has two advantages over a deferral. First, a phase-in is more protective of human health and the environment than a deferral in that it requires those who can obtain financial responsibility mechanisms to do so. Second, when the deferral period is ended, there is likely to be a last-minute rush of activity that could overwhelm the insurance industry's administrative capacity and the capacity of those businesses providing tank replacement, upgrading, and release-detection services.

Furthermore, the Agency does not think this relatively short phase-in will delay the entry of new insurers into the marketplace. If the rule did not include a phase-in of compliance dates, any new insurer would have to (1) develop and announce a new program that would comply with EPA's requirements and (2) process and accept applications for this program within 90 days to allow the regulated community to comply by the effective date of the regulations. EPA believes it would be extremely difficult for UST owners and operators to get pollution liability insurance conforming to the requirements of this rule from new insurers within 90 days of the rule's effective date. The phase-in establishes the necessary time for new insurance programs to develop, publicize their operations, and process applications. With the phase-in, a new program would have 1 year to carry out these steps for its first customers and an additional year to process applications for other members of the regulated community. Furthermore, the regulated community still has a strong incentive to purchase insurance prior to the required compliance dates. The phase-in of compliance with the financial responsibility requirements does not relieve the regulated community of liability for corrective action and third-party liability. Thus, many in the regulated community will attempt to obtain insurance as soon as it becomes available.

Nor does the Agency believe that the phase-in will remove incentives for regulated entities to replace or upgrade substandard USTs or to initiate leak detection. If the rule had only one compliance date, it would be impossible for the existing tank replacement and leak detection industries to provide adequate professional service to the many firms that may need their services. The technical standards rule phases in leak detection and tank upgrading and replacement requirements for the same reason.

Finally, the Agency does not believe that the phase-in will delay the implementation of state funds. None of the state representatives who commented on the Supplemental Notice (53 FR 10401) were of the opinion that the phase-in would delay the implementation of state funds. They explained that states would need time to pass laws authorizing the establishment of a fund, to develop regulations specifying how the fund would be implemented, and to develop revenue sources and capitalize the fund. In fact, EPA views the phase-in as the only way to allow states adequate time to develop thoughtful, sound, and adequately-funded programs. The Agency believes it is more protective of human health and the environment to allow time for the development of well-thought-out programs than to create a situation that will result in the development of state funds that have not been properly designed.

In the example given in the Supplemental Notice (53 FR 10401), the phase-in categories were set up based on the number of tanks owned or operated as an indicator of financial strength and thus the time needed to comply with the rule. In today's rule, the phase-in categories are set up based on UST ownership for petroleum marketing firms and on net worth for non-petroleum marketing firms. One commenter requested that EPA clarify, both for the purpose of the phase-in and for the rule in general, that "individual persons controlling separately operated facilities may * * * treat themselves either as a single owner or operator or as several independent operators." Although this interpretation reflects EPA's intention with regard to most provisions of the final rule being promulgated today (see Section III.A.1. above), it is not the basis for the final rule's phase-in provision. Instead, the phase-in is based on the total number of USTs owned to make clear at what time USTs that are owned and operated by different entities are required to be in compliance with the final rule. UST ownership is a better indicator of both ability to comply with the financial test and to obtain insurance. If the Agency adopted the commenter's suggestion, many more owners or operators of USTs at more than one facility could qualify for a later compliance date. EPA has designated UST ownership, rather than UST operation, as the factor determining the compliance category so that earlier compliance dates will be required for most USTs (since UST-owning firms tend to be larger than UST-operating firms).

The majority of commenters agreed that the number of tanks is the most reasonable basis on which to predicate a compliance date phase-in. The reasons for the choice of the number-of-tanks criterion included:

- The number of tanks reflects a firm's financial strength and its ability to get insurance (and thus to comply with the rule);

- The number of tanks is a partial measure of the risk of release; and

- The number of tanks is easy to determine for compliance purposes and easy to verify for enforcement purposes.

Other phase-in criteria suggested by commenters included measures that were more reflective of risk (e.g., age, storage capacity, or location of tanks), financial strength, and type of industry. One commenter suggested that the basis for compliance should be the ability of owners or operators to self-insure or to obtain insurance from private or public sources. In essence, this is the strategy the Agency has adopted: it involves separating the regulated community into two groups, petroleum marketing firms and other regulated entities. For petroleum marketing firms, the number of tanks owned acts as a reasonable proxy for the ability of a firm to self-insure or to obtain insurance. For other regulated entities, the $20 million in tangible net worth requirement is a good proxy for firms that will be able to use the financial test because almost all firms with $20 million in tangible net worth should be able to use the financial test, irrespective of how many tanks that they own. (Entities with less than $20 million in tangible net worth may not be able to self-insure and insurance has not been available to such firms up to now.)

The Agency rejected basing the phase-in on risk-related measures because a schedule designed to require the highest risk USTs to comply first would not further the Agency's objective in phasing in compliance with the rules. The Agency's objective for phasing in compliance is to give the regulated community the time it will need to obtain assurance. For this reason, in developing the phase-in the Agency considered only those factors (e.g., financial strength) related to the ability of various segments of the regulated community to obtain assurance.

The Agency also notes that requiring high-risk USTs to comply first could have a negative impact on the availability of financial assurance mechanisms. If high-risk USTs were required to comply first (as some commenters suggested), insurers already in the market would be reluctant to insure additional USTs and new insurers would be reluctant to enter the market. Therefore, this would act as a disincentive to a gradual increase in the availability of insurance.

In the example described in the March 1988 FEDERAL REGISTER notice, EPA set up compliance categories and compliance dates as follows:

Compliance Date

Number of Tanks Owned or Operated

Effective date of rule

1,500 or more.

6 months after effective date

50 to 1,499.

12 months after effective date

6 to 49.

18 months after effective date

1 to 5.

For reasons already discussed, EPA decided to base the phase-in on the number of USTs owned and to develop different compliance categories for petroleum marketing firms and for non-petroleum marketing firms to reflect the time necessary for regulated entities to comply with this regulation. The Agency decided to give firms in the second category more time to comply and to change the number of tanks owned (for petroleum marketing firms) in each category so that the categories would more accurately reflect this objective. In making these changes, the Agency was aided by information provided by commenters with regard to the availability of assurance to various segments of the regulated community.

Petroleum marketing firms owning 1,000 or more USTs (as opposed to 1,500 or more USTs) are in Category I because the Agency believes that such firms can almost always use the financial test of self-insurance. (FOOTNOTE #5) Petroleum marketing firms owning between 100 and 999 USTs (as opposed to 50 to 1,499 USTs) are in Category II because the Agency believes this UST ownership spread more accurately represents the UST-owning firms that have insurance now or can obtain it most easily. Petroleum marketing firms owning between 13 and 99 USTs at more than one facility (as opposed to 6 to 49 USTs) are in Category III because this range more accurately represents UST-owning firms that are eligible for insurance but may need more time to obtain it than firms in Category II. In addition, because insurance has not been available to petroleum marketing firms owning only one facility in the past, such facilities have been moved to Category IV.

Category IV was expanded to include firms owning 1 to 12 USTs or, as noted above, only one facility with fewer than 100 USTs (as opposed to 1 to 5 USTs). This expansion of the upper limit of the category from 5 to 12 USTs allows additional time for compliance for the smallest rural jobbers. These firms may have older USTs and greater difficulty obtaining insurance than other petroleum marketers. All non-petroleum marketing firms which cannot self-insure, including local government entities, have also been included in Category IV because pollution liability insurance has not been available to these entities in the past.

C. Definition of Terms (§280.92)

In the preamble to the proposed rule, the Agency discussed definitions for several terms used in the rule. With the exception of "occurrence," the Agency is adopting the definitions as proposed. This discussion addresses only those terms for which the Agency received comment.

1. Accidental Release and Occurrence

In the April 17, 1987, proposal, the Agency defined "accidental release" as

"any sudden or nonsudden release of petroleum arising from operating an underground storage tank that results in a need for corrective action, bodily injury or property damage neither expected nor intended by the tank owner or operator" (§280.91).

This definition incorporates both sudden and nonsudden releases, as required by RCRA §9003(c)(6). In addition, the Agency proposed to define "occurrence" as "an accident, including continuous or repeated exposure to conditions, which results in a release from an underground storage tank."

Two commenters asserted that the proposed definitions of occurrence and accidental release do not reflect standard insurance definitions. The commenters noted that the comprehensive general liability (CGL) form issued by the Insurance Service Office (ISO) defines "occurrence" as "an accident, including continuous or repeated exposure to substantially the same generally harmful conditions." They also noted that the ISO's pollution liability coverage form does not define "occurrence" or "release." Instead, the policy uses the term "pollution incident." These commenters urged EPA to remove the definitions of "occurrence" and "accidental release" from the rule and the certificate and endorsement forms, and to replace them with the term "pollution incident." Another commenter argued that the definition of "occurrence" should be changed to reflect the ISO's newest CGL form.

Commenters warned that if the definitions in the regulation remain at variance with those in use in the ISO's pollution liability coverage form, courts will have to review more than one definition of key policy terms during litigation. Insurers indicated that EPA's use of non-standard definitions in today's rule would reduce the range of predictability in UST coverage and expose insurers to an uncertain amount of liability. Such conditions, they argued, would seriously impair the insurance industry's willingness to provide liability insurance required by today's rule.

In specifying the language in the certificate of insurance and endorsement, the Agency does not intend to modify contractual obligations regarding the extent of coverage under insurance policies used to satisfy the liability coverage requirement. In response to the problems cited by commenters, the Agency has retained the definition of "occurrence" but added clarifying language to the rule. The rule now allows insurance policies containing alternate definitions of "occurrence" or standard terms other than "occurrence," such as "pollution incident," to be used to satisfy the UST liability coverage requirements. This definition of occurrence is included in today's rule to assist in the understanding of the financial assurance requirements, i.e., to clarify the scope of coverage required under the rule. It is not intended to limit the meaning of "occurrence" in a way that conflicts with general insurance industry usage.

The Agency prefers not to require that policies incorporate a specific definition of "occurrence" because of the wide range of definitions currently in use and because insurance practices may change over time. However, the Agency has the authority under RCRA Section 9003(d)(1) to specify acceptable and unacceptable liability insurance policy terms and the Agency may need to specify such terms in the future. In addition, policies employing unsatisfactory definitions of "occurrence" or unsatisfactory terms other than "occurrence" may not provide liability protection in accordance with today's rule.

In addition, the Agency has made a minor change to the definition of "accidental release" simply to capture the meaning more precisely. The modified definition, with the modification in italics, is as follows:

"any sudden or nonsudden release of petroleum arising from operating an underground storage tank that results in a need for corrective action and/or compensation for bodily injury or property damage neither expected nor intended by the tank owner or operator" (§280.92(a)).

The Agency received two comments arguing that the definitions of "occurrence" and "accidental releases" should include releases that are caused intentionally (e.g., sabotage, vandalism). EPA believes that an explicit inclusion is unnecessary. Since "accidental release" is defined as a release resulting in "a need for corrective action and/or compensation for bodily injury or property damage, neither expected nor intended by the tank owner or operator," the relevant determinants of coverage are the intentions and expectations of the insured. Thus, damage resulting from sabotage or vandalism is accidental if the insured party had no intention or expectation of such damage.

Finally, a commenter also suggested that vague terms like "intended" or "expected" in the definition of accidental release be defined in the rule. However, as discussed above, EPA intends to allow insurers flexibility in writing policy language by not defining every policy term explicitly. The Agency recognizes that such terms are open to interpretation, but also realizes that because they are common in insurance industry usage, defining them in the rule is not necessary and may limit availability. Therefore, the Agency believes that it is appropriate to leave interpretation of such terms to private insurance law.

2. Bodily Injury

In the proposal and in the final rule, the Agency defines "bodily injury" as having the meaning given to it by applicable state law. In addition, the definition excludes those liabilities that, consistent with standard industry practice, are excluded from coverage in liability insurance policies for "bodily injury."

The Agency received several comments in favor of the proposed definition and some comments opposed. Commenters opposed to the definition maintained that it would create inconsistent definitions, and thus varying scopes of coverage, from state to state. One commenter proposed that EPA define "bodily injury" as "any damage to a third party which the tank owner or operator is legally liable for causing due to negligence."

The Agency is reluctant to adopt a standard definition for a number of reasons. First, the Agency fears that any attempt to redefine "bodily injury" will result in a more tightly limited insurance market. Comments received from the insurance industry strongly urged EPA to retain the approach in the proposed rule, and predicted that insurers might exit the market if the term is given a standard definition.

Second, EPA recognizes that third parties will generally bring liability claims pursuant to state law. Because the definition of "bodily injury" and the treatment of bodily injury claims differ from state to state, the Agency believes that mandating a nationwide definition would promote confusion in state courts, which would be required to review two definitions of "bodily injury" (i.e., a definition pursuant to state law and a standard definition) during litigation.

Third, the Agency prefers the definitions of terms used in the liability insurance requirements to be consistent with their common meanings within the insurance industry. Since the definition of "bodily injury" often varies from state to state, mandating a standard definition would establish definitions of terms inconsistent with their common meanings.

Consequently, EPA has retained the proposed definition of "bodily injury" in today's final rule.

3. Director of the Implementing Agency

This term refers to the person responsible for implementing the UST program under Subtitle I of RCRA. For USTs in authorized states, this person is the Director of the state agency; for USTs in states without approved programs, this person is the EPA Regional Administrator.

In today's rule, this term replaces the term "Regional Administrator," a term used in the proposed rule, wherever appropriate.

4. Petroleum Marketing Facilities

This definition was not in the proposed rule. It has been added to the final rule to assist in understanding the phased schedule for compliance and to define per-occurrence levels of assurance for USTs. The definition closely follows the statutory language of RCRA §9003(d)(5)(A) and (B). "Petroleum marketing facilities" are all facilities at which petroleum is produced or refined and all facilities from which petroleum is sold or transferred to other petroleum marketers or to the public.

5. Petroleum Marketing Firms

These are all firms owning petroleum marketing facilities. Firms owning other types of facilities with USTs, as well as petroleum marketing facilities, are considered to be petroleum marketing firms. This definition also was not in the proposed rule. It has been added to the final rule to assist in understanding the phased schedule for compliance.

6. Property Damage

In the proposed rule and in the final rule, the Agency defines property damage as having the meaning given it by applicable state laws. In addition, the term excludes those liabilities which, consistent with standard industry practice, are excluded from coverage in liability insurance policies.

One commenter agreed with the Agency's approach, while other commenters suggested that the definition be modified to cover an intentional act (e.g., sabotage). Including intentional acts in the definition, the commenters argued, would ensure that owners or operators will be financially responsible for all leaks and spills, not just those that are accidental or unintentional.

As noted above, the relevant intentions and expectations of damage or injury are those of the insured. Thus, damage resulting from sabotage would be considered accidental if the insured party did not intend or expect such damage.

Consequently, EPA has decided that including intentional acts in the definition of "property damage" is unnecessary.

7. Additional Definitions

One commenter suggested that EPA use the broad term "financial assurance" to designate all acceptable methods of satisfying the financial responsibility requirements, and proposed a definition of the term.

EPA uses the term "financial assurance" to designate all acceptable methods of satisfying the financial responsibility requirements, but is not defining the term in today's rule. Because the rule clearly delineates all financial assurance mechanisms by which owners or operators may satisfy these requirements, the Agency believes that defining the term is unnecessary.

D. Amount and Scope of Required Financial Responsibility (§280.93)

The rule promulgated today requires that owners or operators of petroleum USTs that are located at facilities engaged in petroleum production, refining, or marketing or that handle more than 10,000 gallons of petroleum per month demonstrate evidence of financial responsibility in the minimum amount of $1 million per occurrence to cover corrective action and third-party compensation costs for accidental releases from their tanks. The minimum per-occurrence amount of assurance required for owners or operators of USTs that are not located at facilities engaged in petroleum production, refining, or marketing and that handle 10,000 gallons or less of petroleum per month is $500,000. In addition, the Agency is establishing requirements for annual aggregate levels of assurance, based on the number of USTs to be assured. Today's rule also includes a paragraph (§280.90(e)) that explicitly states that if the owner and the operator of a tank are separate persons, only one person must demonstrate financial responsibility. The Agency's reason for adding this paragraph is discussed in Section III.A.1, Owners and Operators.

The rationale for determining the amount and scope of required assurance is discussed below, as it pertains to the following topics:

(1) Per-Occurrence Amounts.

(2) Aggregate Amounts.

(3) Apportionment of Costs and Level of Assurance under Separate Mechanisms.

1. Per-Occurrence Amount.

Section 280.93(a) of today's rule establishes $1 million per occurrence as the minimum amount of required financial assurance for owners or operators of petroleum USTs located at facilities engaged in petroleum production, refining, or marketing and for owners or operators of petroleum USTs that handle more than 10,000 gallons of petroleum per month. The minimum amount of required assurance for USTs that handle 10,000 or less gallons of petroleum per month and are located at facilities that are not engaged in petroleum production, refining, or marketing is $500,000. The proposed rule required that all owners or operators of petroleum-containing USTs provide assurance in the minimum amount of $1 million.

EPA received numerous comments on the subject of the required per-occurrence amount of assurance. Arguments for lowering this amount of assurance included:

- The costs of almost all UST releases are far lower than $1 million;

- Small businesses cannot afford to obtain $1 million in per-occurrence coverage;

- The money required to pay insurance premiums would be better spent on upgrading tanks;

- Insurance coverage for $1 million per-occurrence is not available; and

- A lower per-occurrence limit would encourage insurers and reinsurers to offer UST pollution liability coverage.

Several commenters pointed out that EPA had required the same per-occurrence limit of $1 million for all USTs even though Subtitle I clearly allows the Agency to set limits lower than $1 million for USTs at facilities not engaged in petroleum production, refining, or marketing and that are not used to handle large amounts of petroleum. The reasons given in support of a lower per-occurrence limit for USTs at these facilities included many of the same arguments presented above and additional reasons specific to facilities not engaged in petroleum production, refining, or marketing. Some of these additional reasons included:

- Low-volume facilities are less likely to have catastrophic-failure-induced large releases;

- Low-throughput facilities will have smaller releases from their underground pipes; and

- Low-throughput facilities can be monitored more accurately.

Finally, several commenters argued that $1 million in per-occurrence coverage might be too low. They explained that past claims data underestimate future claims and that both corrective action and third-party liability awards will be more costly in the future than they have been in the past because of corrective action regulations that impose minimum cleanup standards.

As explained in the proposal, the minimum $1 million per-occurrence level required for owners or operators of USTs at facilities engaged in petroleum production, refining, or marketing was based on the provisions of section 9003(d)(5)(A) and (B) of Subtitle I of RCRA. These sections state:

(5)(A) The Administrator, in promulgating financial responsibility regulations under this section, may establish an amount of coverage for particular classes or categories of underground storage tanks containing petroleum which shall satisfy such regulations and which shall not be less than $1,000,000 for each occurrence with an appropriate aggregate requirement.

(B) The Administrator may set amounts lower than the amounts required by subparagraph (A) of this paragraph for underground storage tanks containing petroleum which are at facilities not engaged in petroleum production, refining, or marketing and which are not used to handle substantial quantities of petroleum.

The Agency's interpretation of these provisions is confirmed by the discussion of this amendment to Subtitle I, section 205 of SARA, in the Conference Report accompanying SARA. The Report states that "The Administrator cannot set a minimum financial responsibility requirement of less than $1 million for tanks which are engaged in petroleum production, refining or marketing * * * " (House Report 99-962, 99th Congress, 2nd Session, p. 264.)

Therefore, absent further instruction from Congress, EPA's per-occurrence requirement for USTs at facilities engaged in petroleum production, refining, and marketing must be at least $1,000,000.

The Agency shares the concern expressed by commenters that releases may be more expensive in the future, and performed an analysis of this issue. The model developed to aid in this analysis estimates both the costs and frequency of UST-related corrective actions. It takes into account both the more stringent cleanup standards that will prevail under the technical standards being imposed by EPA and the fact that releases will be detected sooner, when they are smaller, once the regulations have been promulgated. This analysis showed that the average costs of UST-related corrective actions will be lower rather than higher in the future (see Appendix A of the Regulatory Impact Analysis for the Financial Responsibility Requirements for Underground Storage Tanks Containing Petroleum and Chapter 7 of the Regulatory Impact Analysis of the Technical Standards for Underground Storage Tanks). Because the number of UST-related releases and the extent of the damage associated with these releases will not increase in the future, the Agency is confident that corrective action and third-party liability costs will also not increase in the years after promulgation of these requirements.

In the final rule, EPA allows owners or operators of petroleum underground storage tanks that are not located at facilities engaged in petroleum production, refining, or marketing and that handle an average of 10,000 gallons or less of petroleum per month (based on annual throughput for the previous calendar year) to provide a minimum of $500,000 in per-occurrence assurance. As indicated above, section 9003(d)(5)(B) authorizes the Administrator of EPA to set per-occurrence amounts lower than $1 million for petroleum USTs located at facilities that are not engaged in petroleum production, refining, or marketing and that are not used to handle substantial quantities of petroleum.

Section 9003(d)(5)(C) of Subtitle I lists the factors that the Administrator may consider in setting an amount of assurance lower than $1 million for certain classes and categories of USTs:

- The size, type, location, storage, and handling capacity of underground storage tanks in the class or category and the volume of petroleum handled by such tanks;

- The likelihood of release and the potential extent of damage from any release from underground storage tanks in the class or category;

- The economic impact of the limits on the owners and operators of each such class or category, particularly relating to the small business segment of the petroleum marketing industry;

- The availability of methods of financial responsibility in amounts greater than the amount established by this paragraph; and

- Such other factors as the Administrator deems pertinent.

When the Agency considered these factors for the proposed rule, it concluded that a $1 million per-occurrence level of assurance for all USTs was appropriate and would achieve EPA's goal, which was to set a per-occurrence level high enough to cover the costs of 99 percent of UST release occurrences.

The Agency still believes that this goal is appropriate. Material submitted to the docket in response to the proposed rule has enabled the Agency to perform a more refined analysis of the frequency of per-occurrence claims at various levels. From this analysis, the Agency concludes that a $500,000 level of assurance is adequate to assure the costs of approximately 99 percent of per-occurrence claims for USTs with throughputs no greater than the throughputs characteristic of USTs at retail motor fuel marketing facilities. (This analysis is provided in Appendix B to the Regulatory Impact Analysis.) Thus, the Agency has revised the final rule to provide a lower per-occurrence level for such facilities, and has limited facilities qualifying for this lower per-occurrence amount to those with UST throughputs no greater than retail motor fuel marketing facilities (i.e., 10,000 gallons per month).

In responding to comments on the proposal and revising the rule, the Agency considered each of the criteria in Section 9003(d)(5)(C), both when evaluating a per-occurrence limit of $500,000 and when identifying the class of USTs that would be allowed to use this lower per-occurrence limit. The Agency decided to use monthly throughput as the measure that best distinguishes USTs used in petroleum producing, refining, and marketing, for which Congress mandated a minimum per-occurrence limit of $1,000,000, from USTs used in other industries that might appropriately be assigned a lower per-occurrence limit. As discussed in the preamble to the proposed rule, factors such as age of tank, material of construction, and the presence of a secondary containment are not critical in determining a per-occurrence limit:

Although such factors do affect a tank's propensity to leak, there is no evidence to suggest that any of these factors affects the costs related to a release. The setting of an appropriate per-occurrence level depends on the costs of individual releases rather than on the probability that a release will occur, and there is therefore no reason why the factors mentioned above should have a bearing on the per-occurrence level of coverage required. For example, a release from a 1-year-old tank can be just as expensive to address as a release from a 20-year-old tank.

The Agency based its decision to allow a lower per-occurrence limit for facilities that are not engaged in petroleum production, refining, or marketing and that have a monthly throughput of 10,000 gallons or less primarily on the extent of the potential damage associated with releases from these tanks. The Agency also carefully analyzed the extensive UST claims record submitted by the largest insurer of service station USTs and found that this record provided statistically significant evidence that releases costing more than $500,000 occur less than 1 percent of the time. The Agency has concluded that coverage of $500,000 will assure that the per-occurrence limit is exceeded less than 1 percent of the time. These same data show that a per-occurrence limit set below the $500,000 level would be exceeded more than 1 percent of the time.

For this reason, the final rule rejects those suggestions of commenters that low-throughput USTs be exempted or that the per-occurrence limit for such USTs be set below $500,000.

The choice of 10,000 gallons per month as the definition of "substantial quantities of petroleum" is also consistent with Congressional intent as expressed in the Conference Report accompanying SARA. It states that the Administrator cannot:

set a minimum financial responsibility requirement of less than $1 million * * * for tanks that dispense very large volumes, for instance tanks at airports. (p. 264)

The 10,000-gallon-per-month throughput limit for USTs qualifying for the $500,000 minimum per-occurrence amount is far lower than the volume of fuel dispensed monthly at typical airports.

EPA has not considered economic impact to be a primary factor in determining the appropriate per-occurrence limits. The Agency's regulatory impact analysis found that the cost of insurance premiums would have relatively minor impacts on most smaller firms that are not engaged in retail motor fuel marketing. Further, the threat to human health and the environment posed by releases from USTs is the same, in terms of severity, whether the leaking tank is owned by a small firm or a large firm.

The Agency agrees with those commenters who suggested that facilities outside the retail motor fuel marketing industry may have difficulty obtaining financial assurance mechanisms. The Agency has found that no insurer offering policies to facilities not engaged in petroleum production, refining, or marketing meets these coverage requirements. Lowering the per-occurrence limit may serve to increase the availability of financial assurance mechanisms. A lower per-occurrence limit will make it easier for insurers with limited reserves to offer these policies, will ease the capitalization of RRGs, and will allow states to set up state funds with less commitment of funds.

2. Aggregate Amounts

Section 9003(d)(5)(A) of Subtitle I grants the Administrator discretion to set "an appropriate aggregate requirement" for financial responsibility for petroleum USTs. In §280.92(b) of the proposed rule issued on April 17, 1987, owner s or operators of petroleum USTs were required to demonstrate evidence of financial responsibility in annual aggregate amounts that varied from $1 million to $6 million, depending on the number of USTs assured (see Table 2) by the mechanism or combination of mechanisms. (For the purposes of determining required aggregate levels of coverage only, any reference to tanks means only individual containment units and does not include combinations of these units. See §280.93(c).)

Table 2. Proposed Aggregate Schedule

Number of tanks Annual aggregate amount

1-12 tanks

13-60 tanks

61-140 tanks

141-250 tanks

251-340 tanks

341 or more tanks

$1,000,000

$2,000,000

$3,000,000

$4,000,000

$5,000,000

$6,000,000

 

The Agency considered this appropriate because the aggregates were set at a sufficiently high level that corrective action and third-party liability costs incurred in any one year from releases from petroleum USTs would not be exceeded more than one percent of the time. The aggregate amounts were derived from an analysis of the probability and magnitude of corrective action and third-party liability costs during the first five years after the technical standards were promulgated. EPA's analysis used an annual probability of 11.8 percent that a tank would experience a release during these years.

The Agency received numerous comments on the proposed aggregate schedule, many of which called for lower aggregate levels. Commenters justified their requests for lower aggregates on the grounds that insurers reported no release costs exceeding $2 million and that the Agency had based its proposed aggregate schedule on an unrealistically high (11.8 percent) release probability rate. They also pointed out that aggregate insurance coverage over $2 million was unavailable, higher aggregate levels would cause correspondingly higher insurance premium costs, and the money needed for higher premium costs would be better spent on upgrading tanks. The two largest insurers of USTs noted that an aggregate of $2,000,000 had never been exceeded on any of their policies.

The Agency continues to find that the aggregate is most appropriately set on the basis of the number of USTs covered by a financial mechanism, and that an aggregate should generally provide adequate funding 99 percent of the time. However, the Agency agrees with those commenters who argued that EPA's initial estimates, both of the costs and probabilities of releases, were too high, especially for those firms that will actually be able to obtain insurance. In addition, the Agency recognizes that both the availability of financial mechanisms and economic impacts should be considered in determining classes and categories with respect to aggregate limits, as authorized under section 9003(d)(5)(C). As a result of these considerations, the Agency has revised its aggregate schedule so that the maximum aggregate is $2,000,000 (the maximum aggregate currently available), and mechanisms covering 100 USTs or less may use an aggregate of $1,000,000. Table 3 presents the aggregate schedule included in the final rule.

Table 3. Aggregate Schedule

Number of tanks

Annual aggregate amount

1-100 tanks

101 or more

$1,000,000

$2,000,000

This revised aggregate schedule assures that most firms will not exceed the aggregate more than 1 percent of the time, given the Agency's revised estimates of the risk of UST releases. (See Appendix B of the Regulatory Impact Analysis for the Financial Responsibility Requirements for Underground Storage Tanks Containing Petroleum.) The revised aggregate schedule also has a number of important advantages over the proposed schedule. First, insurance programs do not currently provide coverage for aggregates higher than $2 million. Thus, under the revised schedule, which caps aggregates at $2 million, firms will be able to use existing insurance programs. Also, the lowered aggregates should encourage greater availability of mechanisms other than insurance and thus enable more owners or operators to utilize alternate mechanisms. For example, by reducing the amount of capitalization required, the revised schedule will make it easier to capitalize RRGs and state funds that form to provide UST pollution liability insurance. In addition, firms that already have pollution liability insurance for their USTs at the $1 million and $2 million aggregate levels will not be required to find methods of meeting the balance of their financial responsibility obligations. Given that these aggregate levels ensure that most UST owners and operators will not exceed the aggregate more than 1 percent of the time, EPA believes that the cost of requiring such additional assurance would be unnecessary.

Under the revised aggregate schedule, there are two categories of firms that may exceed the aggregate more than 1 percent of the time. The first category includes firms with more than 500 USTs. (These firms also could have exceeded the aggregate more than 1 percent of the time under the proposed aggregate schedule.) The Agency has not extended the aggregate schedule for firms owning more than 500 USTs because these firms are large and usually have more than $1 billion in net worth. Such firms can easily meet their financial obligations for UST corrective action and third-party liability, even if these obligations exceed $2 million. Further, these firms tend to have good leak prevention programs and consequently have lower risks of UST releases than most smaller firms.

The second category of firms that may have more than a 1 percent chance of exceeding the aggregate are firms with between 40 and 100 USTs that do not have sufficient leak detection programs. However, most firms with between 40 and 100 USTs are currently insured and meet insurers' leak detection requirements. Because the small number of firms with between 40 and 100 USTs that do not have sufficient leak detection programs will have to meet EPA's UST leak detection technical standards within 5 years, the Agency has decided not to set a higher aggregate for these firms on the basis of their temporarily higher risks.

The Agency received a number of comments suggesting that a lower aggregate level for owners or operators of upgraded tanks could provide an incentive for other owners or operators to upgrade their systems -- in essence a "credit system." EPA agrees with these suggestions, but because the Agency has lowered the maximum aggregate level of required assurance from $6 million to $2 million and has raised the number of tanks qualifying for the $1 million aggregate from 12 to 100, much of the incentive to upgrade tanks and qualify for a lower level of required assurance has effectively been eliminated. Given that few owners or operators would be able to upgrade tanks to a level that would qualify for a lower amount of assurance, EPA believes that the complexity of developing, implementing, and administering such a program far outweighs its potential benefits. Therefore, the Agency still believes that it is appropriate to continue to use the number of tanks owned or operated, rather than tank characteristics, as the basis for determining aggregate levels.

During the comment period, a number of questions were raised regarding the effective date for increases in an aggregate level when an owner or operator acquires or installs additional tanks. The Agency agrees that it could prove awkward to change an aggregate level in midyear and took that factor into consideration in determining when financial assurance levels should be updated. Financial assurance mechanisms such as insurance policies and letters of credit are generally written for one year, and the final rule is consistent with this practice. Thus, an owner or operator who is using a single mechanism to assure his tanks and who has increased the number of tanks for which he is providing financial assurance is required to update the level of assurance (i.e., the aggregate level) on the anniversary date of the financial assurance mechanism. If this same owner or operator is using a combination of mechanisms to provide financial assurance for his tanks, the level of assurance must be updated by the first-occurring anniversary of any of the mechanisms being used (excluding a financial test or guarantee) (see §280.93(f)).

The question of tank numbers also arose in the context of determining the appropriate aggregate amount when a firm is acting as a self-insurer, guarantor, and/or indemnitor (however, indemnities are not an allowable mechanism under the final rule, as discussed in Section III.G of the preamble). By aggregate amount, EPA means the total of all costs potentially incurred within a given year for all releases from petroleum USTs for which evidence of financial responsibility is being demonstrated by a single mechanism or a combination of mechanisms. If an owner or operator uses different financial assurance mechanisms to cover different USTs, the appropriate aggregate amount is based on the number of tanks covered by each separate mechanism or combination of mechanisms. One commenter recommended that, for the purpose of determining whether a firm passes the financial test, the aggregate level of coverage be "based on the total number of tanks for which a firm is responsible by self-insurance, indemnity, or guaranty." Because this was EPA's intention at the time of the proposal, the Agency recognizes that the explanation in the preamble to the proposed rule confused some commenters. By stating that the aggregate amount is based on the number of tanks for which a single mechanism or combination of mechanisms is being used to demonstrate evidence of financial responsibility the Agency means:

1. If an owner or operator self-insures his own tanks and guarantees tanks belonging to a different owner or operator, the owner must pass the financial test based on the total number of tanks self-insured and guaranteed. Two different examples follow:

- If an owner is self-insuring 60 tanks and guaranteeing 60 tanks, the amount of annual aggregate assurance to be demonstrated to use the financial test to self-insure and guarantee these tanks is $2 million. The guarantee must be issued for an aggregate amount of $1 million.

- If a guarantor guarantees 60 tanks for each of three different owners, the amount of annual aggregate assurance to be demonstrated to use the financial test to guarantee these 180 tanks is $2 million. Each of the three guarantees, however, must be issued for an aggregate amount of $1 million.

2. If an owner or operator uses a combination of mechanisms (e.g., insurance and surety bond) to demonstrate evidence of financial responsibility, the aggregate amounts provided by these mechanisms added together must equal the required aggregate amount for the number of tanks for which these mechanisms are demonstrating financial responsibility. For example, if an owner with 200 tanks has insurance with a $1 million aggregate, aggregates of additional mechanisms for these tanks must equal at least $1 million, for a total of $2 million in aggregate coverage.

3. If an owner or operator uses one financial mechanism to demonstrate evidence of financial responsibility for one set of tanks and another mechanism to demonstrate evidence of financial responsibility for a different set of tanks, each mechanism must have an aggregate amount appropriate to the separate set of tanks assured. For example, an owner has a total of 300 tanks: 140 tanks in one state and 160 tanks in another state. The 140 tanks are assured at the $2 million aggregate level by a mandatory participation state fund that only assures tanks in that state. The owner must provide additional financial assurance at the $2 million aggregate level for the other 160 tanks located elsewhere.

3. Apportionment of Costs and Levels of Coverage Under Separate Mechanisms

Several commenters questioned the provision that separate mechanisms (or combinations of mechanisms) obtained for corrective action and third-party liability must each be at the full amount of required assurance. The commenters believed that this provision would be prohibitively expensive. The Agency has retained this provision in the final rule despite the added costs of providing coverage under this approach. As explained in the preamble to the proposed rule, the Agency decided not to apportion costs between third-party liability and corrective action because apportionment limits the amount of funds that are available for either type of cost. Thus, mechanisms covering these costs separately cannot be set at amounts less than the full amount of required assurance.

Owners or operators may use a combination of mechanisms to obtain a total of $1 million per occurrence and appropriate aggregates, as long as both corrective action and third-party compensation are fully covered. For example, an owner or operator may obtain insurance coverage for the first $100,000 of corrective action and third-party liability costs and use an approved state fund to cover corrective action and third-party liability costs in excess of $100,000 up to $1,000,000. In another example, an owner or operator could obtain insurance coverage for the first $100,000 of corrective action and $300,000 of liability costs and use an approved state fund to assure corrective action costs above $100,000 and third-party liability costs above $300,000, up to $1 million.

E. Allowable Mechanisms and Combinations (§280.94)

1. Mechanisms Allowed. The proposed rule allowed a variety of mechanisms to be used to demonstrate financial responsibility, including: a financial test of self-insurance, guarantee contract, indemnity contract, insurance, RRG coverage, surety bond, letter of credit, state-required mechanisms, or a state fund or other state assumption of responsibility. In general, commenters supported the range of allowable mechanisms proposed by the Agency. As discussed below, the final rule authorizes the use of each of the proposed mechanisms, with the exception of the indemnity contract, and an additional mechanism, a fully-funded trust fund.

The preamble to the proposed rule stated that three mechanisms were considered but not included in the set of allowable mechanisms: trust funds, security agreements, and lines of credit. One commenter explicitly supported the Agency's rationale for excluding trust funds and security agreements. The Agency rejected security agreements because of three concerns with respect to the adequacy of the assurance such agreements would provide: 1) the liquidity of the collateral subject to the agreement; 2) the procedural requirements to establish and maintain a security agreement; and 3) the ability of the implementing agency to seize and sell the collateral.

One commenter urged the agency to allow lines of credit, stating that lines of credit could be used for UST purposes as well as for other business purposes. The Agency believes, however, that its basis for rejecting lines of credit (i.e., that they are conditional on the current financial standing of the borrower and therefore do not represent a substitution of the issuer's credit for the borrower's) continues to be valid and, thus, that lines of credit should not be an allowable mechanism.

Another commenter advocated the inclusion of trust funds in the set of allowable mechanisms, claiming that large firms may want to use a trust fund to cover multiple tanks if other mechanisms are not available. The commenter recommended allowing either a fully funded trust fund or partial funding combined with additional coverage from another instrument.

The Agency has decided to include the trust fund as an allowable financial assurance mechanism. (See also Section III.M of this preamble.) For reasons cited in the preamble to the proposed rule, a trust fund with a build-up period does not provide adequate financial assurance for corrective action and third-party liability which could be incurred at any time in the future. However, the Agency will allow a trust fund that is immediately funded at the full amount of coverage, or partially funded and combined with another mechanism to provide full coverage. Although such a trust fund will be costly compared to other mechanisms, the Agency decided to allow it as another option to the coverage requirements.

The Agency has also removed indemnities from allowable mechanisms. In order to cover third-party liability, indemnities so closely duplicate the structure and operation of a guarantee contract that there was little to be gained by including it, and including it as a separate mechanism might create unnecessary confusion. Indemnities would generally be provided by the same firms that provide guarantees and thus their inclusion in the rule would not increase the number of potential providers of assurance.

2. Combinations of Mechanisms. Under the proposed rule, any combination of allowable financial assurance mechanisms could be used to demonstrate financial responsibility for corrective action and third-party compensation. Commenters in general supported this approach.

In the preamble to the proposed rule, the Agency discussed a "double-counting" problem that may arise when a financial test is combined with a guarantee provided by a corporate parent. In many cases, the reported net worth of a corporate parent includes the net worth of its subsidiaries. If a subsidiary uses the financial test (based on its own net worth) in combination with a parent guarantee (based on the parent's net worth), the subsidiary's assets available to cover UST obligations will be double counted. This double-counting will exaggerate the reserves available to the subsidiary and the parent to cover UST obligations and thus may provide inadequate financial assurance. To avoid this problem, the Agency suggested that, in cases where a financial test is combined with a guarantee, the financial information supporting the two instruments cannot be drawn from consolidated statements.

One commenter objected to the Agency proposal on two counts. First, the commenter pointed out that the Agency did not include the prohibition against consolidated financial statements in cases of a combined financial test and guarantee in the proposed rule itself, but only in the preamble. Second, the commenter stated that preparing unconsolidated financial statements would be costly for many firms and would effectively require firms to reveal generally confidential, unconsolidated data. The commenter recommended that some other means be found to address the double-counting problem of a combined financial test and guarantee.

Despite this last objection, the Agency has decided to incorporate in the final rule (§280.94(c)) the restriction on the use of consolidated financial statements in support of a financial test and guarantee combination. While the Agency acknowledges that this provision may impose costs on those financial test users that do not routinely prepare statements that are not consolidated with those of their guarantors, commenters have not suggested an alternative and the Agency sees no other simple way to ensure that a combined financial test and guarantee offers the full amount of net worth coverage that the Agency is requiring. If the costs of preparing unconsolidated statements and of revealing confidential business information outweigh the benefits of using a combined financial test and guarantee, then owners or operators have other financial assurance mechanisms available.

EPA does agree, however, that the restriction on the use of consolidated financial statements should be formalized in the rule itself and has accordingly added this provision at §280.94(c).

3. Attorney General Certification (§280.94(b)). The proposed rule required that a guarantee, indemnity contract, or surety bond have a certification by the Attorney General of any state where the tanks being assured are located that the mechanism is valid and enforceable in that state. This provision was designed to ensure that the mechanisms satisfy necessary contractual formalities or requirements of a state's laws.

Several commenters objected to the requirement for an Attorney General's certification. They maintained that state Attorneys General will find the "valid and enforceable" standard unacceptable and that they do not possess the statutory authority to issue such a certification. Another commenter claimed that the certification is unnecessary because the "ultra vires" defense is essentially untenable and the right of third parties to enforce such instruments is a commonly accepted legal principle.

The Agency disagrees with the commenters' concern over the certification issue. First, state Attorneys General have indicated their willingness to provide "valid and enforceable" certifications required for the RCRA Subtitle C corporate guarantee for liability coverage (40 CFR 264.147(g) and 265.147(g)). Of a group of state Attorneys General surveyed regarding the Subtitle C corporate guarantee for liability coverage, no responding Attorney General refused to issue a certification for this corporate guarantee based on a lack of statutory authority. However, several Attorneys General indicated that such a request could only be made through a state agency.

Second, the surety bond and guarantee authorized in today's rule may be subject to the insurance laws and regulations of certain states. Although the "ultra vires" defense is generally no longer considered tenable, the Attorney General certification requirement ensures that any contractual formalities unique to a particular state have been addressed in the contractual agreement and that questions concerning the validity of the agreement will not delay the provision of funding for corrective action. The Agency recognizes that some states may require minor changes to the wording of the instruments to ensure that they are valid and enforceable under the laws of the state. The final rule requires submission of a letter by the Attorney General of a state verifying the validity and enforceability of the guarantee and surety bond before these mechanisms may be used to demonstrate financial responsibility.

4. New Mechanisms. Many commenters advocated adding a mechanism under which the federal government provides some form of financial assurance. The suggested forms for this mechanism ranged from a federal fund to some form of federal insurance pool.

Several commenters advocated a federal insurance program to offer liability insurance at a reasonable price. One commenter supported a program similar to the federally-run Flood Insurance Program under which premiums are paid by member corporations. However, another commenter said this approach would not work, because insured parties would not want to subsidize other parties with USTs installed over vulnerable ground-water areas.

Several other commenters advocated various forms of federal funds. One suggested approach was to establish a loan fund from which owners or operators could borrow at no interest and repay over a 25-year period. Another suggestion was to establish a fund to cover events that cost between some established amount that reflects average remedy costs and one million dollars. Under this approach, the fund would only be available to owners and operators who demonstrate responsible monitoring and leak prevention practices.

In the SARA amendments to Subtitle I, Congress has established a $500 million Leaking Underground Storage Tank (LUST) Trust Fund for addressing releases from petroleum USTs. However, after the effective date of the technical standards, use of the Trust Fund is authorized by RCRA §9003(h) only in the following limited circumstances: (1) a responsible owner or operator capable of taking prompt and appropriate corrective action cannot be identified; (2) prompt action is required to protect human health and the environment; (3) the cost of the corrective action exceeds the financial responsibility requirements established under this rule and expenditure of additional funds is necessary; and (4) the owner or operator has failed or refused to comply with a corrective action order. (Uses of the Fund are discussed in more detail in Section IV.B.) The Fund may not be used for the purposes suggested by the commenters. Nor is EPA authorized under Subtitle I to develop another fund for any of the purposes suggested by the commenters.

In addition, one of the Agency's major goals reflected throughout the entire UST regulatory program is to encourage development of the UST program as a state-implemented program. EPA encourages states to consider developing the type of funds that commenters urged should be undertaken by the federal government. Several different types of state funds or state-backed insurance programs can serve as assurance mechanisms to allow owners and operators to comply with the financial responsibility rule. In addition, state funds may provide valuable assistance and incentives to the regulated community to comply with the new tank performance standards.

5. Specification of Tanks in Financial Assurance Instruments. In the proposed rule, the Agency required that the financial assurance instruments list by identification number the specific tanks that they cover. Many commenters addressing specific mechanisms argued that this requirement is unnecessary and could in fact limit coverage or delay payment from the assurance mechanism. They felt that listing tanks individually could lead to contention as to which tank was the source of release.

This final rule requires the listing of facilities where assured tanks are located rather than the tanks themselves. The Agency has concluded that listing of tanks at a facility where all tanks are assured under a single mechanism is unnecessary. A listing by facility should also provide greater certainty concerning which tanks at a given location are covered by the policy. Moreover, listing tanks by facility also prevents delays in payment that might arise if coverage were triggered only after identification of the particular tank that had caused the damage.

In today's rule the language of the assurance instruments is amended to strike the requirement for tank identification numbers and add a statement indicating that the required aggregate coverage levels have been purchased. Each instrument must identify each facility covered by the mechanism and the number of tanks at each facility. If separate mechanisms are used to cover different USTs at one location, the tanks covered by each mechanism must be identified in the wording of the mechanism.

F. Financial Test of Self-Insurance (§280.95)

1. Proposed Financial Test

As part of the underground storage tank requirements proposed on April 17, 1987, EPA included a financial test that could be used by owners and operators to self-insure. UST owners or operators able to meet the proposed financial test criteria would not be required to obtain insurance or another financial assurance mechanism to demonstrate evidence of their financial responsibility for corrective action and third-party claims arising from UST releases. The financial test of self-insurance was also proposed as a means to qualify guarantors and indemnitors of firms owning or operating USTs.

As originally proposed, the Subtitle I financial test consisted of the following criteria:

a. The firm must have a tangible net worth equal to at least 10 times the amount of aggregate assurance required for UST financial assurance. The proposed amount of required aggregate assurance ranged from $1 million to $6 million, depending on the number of tanks the owner or operator, guarantor, or indemnitor was assuring for EPA or an authorized state. If the firm was also using a financial test to meet the financial responsibility requirements for the costs of closure, post-closure care, liability coverage, and/or corrective action at a Subtitle C facility, or for the costs of plugging and abandonment at a Class I Hazardous Waste Injection Well, the firm was required to have a tangible net worth equal to at least 10 times the sum of these costs plus the required aggregated coverage for its USTs.

b. The firm must have a tangible net worth of at least $10 million.

c. The firm must either file annual financial statements with the SEC or annually report the firm's tangible net worth to Dun & Bradstreet (D&B), which must have assigned the firm a financial strength rating of 4A or 5A.

d. The firm's year-end financial statements, if independently audited, could not include an adverse auditor's opinion or a disclaimer of opinion.

In addition to these financial test criteria, the proposed requirements included procedures for financial test reporting and certification. Within 90 days after the close of each fiscal year, the chief financial officer of the firm owning, operating, guaranteeing, or indemnifying had to sign a letter reporting the year-end financial information supporting the firm's use of the financial test. If an owner or operator, guarantor, or indemnitor found at the end of the fiscal year that he was no longer eligible to use a financial test, the owner or operator was required to obtain an alternate mechanism within 120 days of the end of the fiscal year. Finally, the proposed rule authorized the Regional Administrator to disqualify a firm's use of the financial test if he found, based on reports of the firm's financial condition, that the firm no longer met the financial test requirements. The owner or operator would have 30 days after notification of such a finding to obtain another financial assurance mechanism.

The criteria for the proposed Subtitle I test reflected several key Agency objectives. First, the reliance of the test principally on a net worth measure was intended to keep the test relatively simple to administer and monitor, in view of the large number of firms to be regulated under Subtitle I requirements. At the same time, the net worth criteria were designed to ensure that virtually all firms able to pass the test would also be able to meet their UST obligations. In particular, the requirement that firms demonstrate a level of net worth 10 times the size of their potential UST obligations was based on an Agency analysis of failure rates among firms classified on the basis of their ratios of UST liabilities to net worth. The Agency found that, for those firms with UST liabilities equal to 10 percent or less of their net worth, the associated probability of bankruptcy was approximately one percent. Therefore, to achieve a level of assurance such that no more than one percent of financial test users would go bankrupt as a result of their UST obligations, the Agency decided to require that financial test users maintain their net worth at a level at least 10 times their environmental obligations.

By requiring that other environmental obligations assured by a financial test be aggregated with the required UST assurance when determining the amount of net worth to require, the Agency wished to prevent financial test users from diluting the degree of assurance provided by the test. Similarly, the requirement that there be no auditor's disclaimer of opinion or adverse opinion was also intended to increase the margin of security provided by the test. A disclaimer of opinion or an adverse opinion indicates that the auditor has found material uncertainties regarding the firm's valuation of its assets, current litigation or tax liabilities, or changes in accounting method. Therefore, because these opinions indicate that the reported net worth of a firm may be greater than its actual net worth, there is considerable doubt as to whether a firm receiving a disclaimer of opinion or an adverse opinion has sufficient resources to meet its UST obligations.

Finally, the requirement that firms either file their financial statements with the SEC or report to D&B and obtain a D&B financial strength rating of 4A or 5A was meant to ensure that the information used to support a financial test would be publicly available and therefore easily verified by EPA or state regulators. At the same time, by allowing a D&B rating as an alternative to filing with the SEC, the Agency wished to make the test available to the large number of privately-held UST owners and operators who would not otherwise be submitting their financial statements to the SEC.

2. Comments on the Proposed Financial Test.

EPA received comments on its proposed Subtitle I financial test from a wide representation of firms and entities that will be affected by the UST requirements. These included both publicly-and privately-held firms, municipalities, trade associations, environmental groups, state regulatory agencies, and firms representing all aspects of UST ownership: owners of a single tank or many tanks, petroleum refiners and marketers, and firms engaged in businesses other than petroleum production, refining, or marketing. The majority of comments focused on (1) the net worth criteria of the financial test; (2) requirements for financial test certification and reporting; and (3) the ability of municipalities to use the test. Comments were also received on a number of miscellaneous issues, such as the aggregation of other environmental costs with the required level of UST coverage; the use of a binding guarantee to support the financial test; and the extension of the aggregate schedule for owners or operators using a financial test to assure a large e number of USTs. The substance of the major comments received is briefly summarized below, followed by the Agency's rationale for accepting or rejecting commenters' recommendations in the final financial test requirements.

a. Net Worth Criteria of the Financial Test. Many commenters objected that the proposed financial test would not be available to any but the largest petroleum distributors or refiners and therefore recommended that the net worth criteria of the test be relaxed to allow smaller businesses to use the test. Other commenters argued that a lower net worth multiple was appropriate in view of the fact that the proposed per-occurrence and aggregate amounts of coverage were much higher than the average costs of UST releases. Commenters also questioned why a 10 times net worth multiple was proposed for Subtitle I, when a six times net worth multiple is required for the Subtitle C test for closure and post-closure care and liability coverage.

The Agency agrees that the availability of the financial test will be limited to larger firms in the regulated community; nevertheless, EPA also believes that this restriction is necessary to increase the likelihood that a financial test user will be able to pay for its potential UST obligations. Because the incidence of bankruptcy among firms with less than $10 million in tangible net worth is approximately two times as great as the bankruptcy rate among firms with more than $10 million in tangible net worth, the Agency has decided to retain the minimum $10 million tangible net worth requirement in the final rule.

For similar reasons, the Agency has also decided to retain the requirement that tangible net worth be at least 10 times the required UST aggregate for any firm using the financial test. Lowering the net worth multiple would mean that more than one percent of financial test users would be predicted to fail without funding their UST obligations -- a risk that the Agency does not believe should be accepted among financial test users, particularly since owners or operators who use any of the other financial assurance mechanisms allowable under Subtitle I (insurance, surety bond, etc.) pose little risk of incurring unfunded UST obligations.

Other changes are, however, being made in the final UST rule that should make the 10 times level of net worth somewhat less restrictive to potential financial test users. First, the schedule of required annual aggregates has been modified (see Section III.D), so that the maximum annual aggregate to be assured is $2 million rather than $6 million as originally proposed. Thus, without changing the net worth requirement, the corresponding level of required net worth will nevertheless be lower for many firms owning and operating large numbers of USTs.

Second, the Agency has incorporated into the final rule (§280.95(c)) a second set of financial test criteria that may be used instead of the originally proposed "net worth" test. Owners or operators may now choose to use the financial test criteria of the Subtitle C test for liability coverage, as specified in §§264.147(f)(1) or 265.147(f)(1), to demonstrate their ability to pay for their UST obligations. These criteria are included in the final rule as Alternative II, while the originally proposed financial test is retained as Alternative I. As a result of this addition, firms with a tangible net worth of $10 million and six times their UST obligations will be able to use a financial test under Alternative II, as long as they also have:

- At least 90 percent of their assets in the United States, or U.S. assets at least six times their UST obligations; and

- Net working capital at least six times the required amount of UST aggregate coverage; or

- A current Standard and Poor's bond rating of AAA, AA, A, or BBB, or a current Moody's bond rating of Aaa, Aa, A, or Ba.

As with Alternative I of the Subtitle I financial test, if the firm is using a financial test to assure the costs of closure, post-closure care, corrective action, liability coverage, and/or plugging and abandonment costs at a Class I Hazardous Waste Injection Well, then the multiple requirements of Alternative II must be applied to the sum of these costs plus the UST-required annual aggregate. EPA believes the two tests provide equivalent assurances of financial strength.

EPA has decided to adopt this Alternative II financial test in addition to Alternative I as a way of increasing the availability of the financial test without jeopardizing the level of assurance provided by the test. As designed for the Subtitle C liability test, and now for the UST Alternative II test, the requirement that either 90 percent of a firm's assets be in the United States or that U.S. assets be at least six times its UST obligation is intended to ensure the accessibility of these assets, should the firm require them to meet its UST costs. The net working capital requirement is designed to measure the adequacy of a firm's liquid resources, given the potential level of its environmental obligations. Because, however, the level of net working capital can vary significantly by industry, the Agency allows firms to meet the bond rating requirement as an alternative to the net working capital requirement. Thus, financially healthy firms that typically maintain relatively low levels of working capital due to the nature of their business can nevertheless use the bond rating alternative to demonstrate that they have adequate liquid resources to meet their obligations.

The Agency decided to use the financial test criteria of the Subtitle C test for liability coverage for the UST financial test because they were specifically designed for assurance of possible, rather than certain, costs. For this reason, these criteria are somewhat less stringent than the standards of the Subtitle C closure and post-closure test where future costs that are certain to be incurred are being assured. Furthermore, the criteria selected for the Alternative II test have the advantage of being easily obtained from public sources even for those firms that do not have audited financial statements or do not report to the SEC.

b. Requirements for Certification and Reporting. EPA received two comments endorsing the Agency's proposal not to require firms using the financial test to obtain a special auditor's report verifying the financial test information contained in the chief financial officer's report. Other commenters, however, objected to the proposed requirements for financial test certification and reporting on the grounds that such requirements were unnecessarily burdensome and restrictive. Specific objections to the reporting and certification requirements are summarized below, followed by the Agency's response to each of these objections.

- The requirement that the chief financial officer list in his annual letter every tank being assured by the financial test would be especially time-consuming for owners and operators of a large number of tanks.

EPA agrees that the requirement for individual tank listing in the chief financial officer's letter may impose an unnecessary recordkeeping burden on firms with many USTs or on firms that frequently change their inventory of USTs. The Agency has therefore adopted in the final rule the suggestion that financial test users list the sites or facilities where their tanks are located, rather than each tank. (This same suggestion has been adopted for all the financial assurance mechanisms in the final rule; see Section III.E.5.) If, however, separate mechanisms or combinations of mechanisms are used to assure different sets of USTs at a location, individual tanks must still be identified.

- Other ratings, such as a Moody's or a Standard and Poor's rating, should be allowed as a substitute for a D&B; rating as part of the financial test criteria.

EPA has decided not to allow a bond rating from Moody's or Standard and Poor (S&P;) as part of the Alternative I test, because these ratings cannot be used in the same way as D&B; ratings or SEC reports -- namely, to verify that a firm has at least $10 million in net worth. The Agency has, nevertheless, incorporated requirements for a Moody's or S&P; bond rating in the Alternative II test: under §280.95(c)(1), a financial test user may either demonstrate that it has net working capital at least six times the required amount of UST aggregate coverage or that its most recent bond issue has received an investment grade bond rating from Moody's or S&&P.; As such, the bond ratings are intended to increase the availability of the test to those firms that are financially strong, but because of the nature of their business, do not routinely maintain high levels of working capital. The bond ratings are not, however, intended to provide evidence of the level of a firm's net worth. In the Alternative II test, this purpose is instead accomplished by the requirement that a firm either report to the SEC, the Energy Information Administration, or the Rural Electrification Administration, in which case its net worth can be easily verified in the reports publicly available from these agencies, or submit a special auditor's report, corroborating the firm's declaration that it has at least $10 million in tangible net worth.

- The annual reports filed by utilities with the Energy Information Administration and by rural electric cooperatives with the Rural Electrification Administration are publicly available. The Agency should allow reporting to one of these agencies as a substitute for reporting to the SEC.

The Agency agrees with these commenters. Because the annual reports filed by utilities with the Energy Information Administration and by rural electric cooperatives with the Rural Electrification Administration are publicly available and equivalent to annual reports filed with the SEC, the Agency will allow an annual report to one of these two agencies to substitute for reporting to the SEC.

- The 90-day deadline for filing financial test information after the firm's fiscal year end is inconvenient in view of other deadlines for filing with public agencies.

EPA recognizes that filing with the SEC is a time-consuming process, involving the compilation and verification of large amounts of financial data. Because the UST financial test relies on the same information that is reported to the SEC, many firms will not be able to prepare their financial test submission until they have first completed the SEC filing. Furthermore, the deadline for the annual reports filed by utilities with the Energy Information Administration is April 30 (i.e., 119 days after the end of the calendar year), whereas there is no strict deadline for filing with the Rural Electrification Administration. In view of these considerations, the Agency has decided to extend the deadline for completing the UST financial test by an additional 30 days. This means that the financial test information is now required to be completed 120 days after the end of the firm's reporting year, rather than 90 days, as originally proposed. With this change, the preparation of the UST financial test information should not add significantly to the reporting burden of firms.

Given this extension of the reporting deadline, the Agency has also decided to extend the deadline for obtaining a new financial assurance mechanism for those firms that find that they can no longer use a financial test. The final rule now requires that firms must obtain alternative coverage within 150 days of the end of the year reported in their annual financial statements if these statements indicate that they no longer meet the financial test criteria (280.95(e)). This 150-day period is based on the expectation that firms will need up to 120 days after the close of their reporting year to compile their financial information and an additional 30 days to find an alternate mechanism if this information does not support renewing their financial test.

- The proposed rule did not clearly define the authority given to the Regional Administrator to request further information from financial test users.

EPA has retained in the final rule the proposed provision authorizing the Director of the implementing agency to require reports of financial condition at any time from a financial test user and to disallow use of the financial test if these reports demonstrate that the financial test criteria are no longer being met (§280.95(f)). In response to commenters' concern that such authority could be used arbitrarily to disqualify the use of the test by some firms, the Agency emphasizes that the information requested by the Director of the Implementing Agency could be used only to verify compliance with the financial test requirements as they are promulgated under §280.95(b) or (c) and (d). Generally, such information would include unaudited interim financial statements (such as 10-Qs submitted to the SEC) or mid-year restatements of financial information (such as 8-Ks submitted to the SEC). Any information not bearing on the requirements specified in the financial test would not be used to disqualify an owner or operator. The Agency has modified the wording of this provision to make its intention clearer in this respect.

- Reporting of financial information to EPA could result in anti-competitive activity because EPA is under no obligation to keep such information confidential.

EPA does not believe that the financial test reporting requirements will in any way violate a financial test user's interest in keeping information confidential, because the test relies only on information that is already reported to other organizations that make this information publicly available. Furthermore, the financial assurance rules do not require regular reporting of information to EPA, but instead require that owners or operators maintain a record of this information at their place of business.

In summary, the Agency emphasizes that the reporting and certification requirements for the Alternative I financial test are designed to be minimally burdensome to firms, while still ensuring that financial test information can be verified through sources other than the owner or operator. Because firms will be allowed to meet the test requirements by reporting their net worth to Dun & Bradstreet as an alternative to reporting to the SEC, the Energy Information Administration, or the Rural Electrification Administration, financial test users will not necessarily be required to have audited financial statements. For owners and operators who opt for the Alternative II financial test, however, the reporting and certification requirements are stricter. Specifically, Alternative II requires that the financial statements of an owner or operator using the financial test be independently audited. EPA considers this requirement to be necessary in the case of Alternative II because of the type of information called for by the test -- namely, the level of net working capital and the level of U.S. assets. The measurement of these variables can differ substantially according to the accounting method used to prepare financial statements. By requiring that the financial statements of Alternative II test users be independently audited, EPA has, at a minimum, the assurance that these variables will be measured in a relatively consistent and conservative fashion and in accordance with generally accepted accounting principles.

Furthermore, in the final rule, Alternative II requires a special auditor's report from those firms that do not file their statements with the SEC, the Energy Information Administration, or the Rural Electrification Administration. The reason for this requirement is to provide the Agency with some objective measure of the validity of the information reported by those firms whose financial information may not otherwise be publicly available. Thus, this requirement serves the same basic purposes as the D&B rating that is included as part of the Alternative I financial test.

c. Availability of the Financial Test to Municipalities. Many commenters on EPA's proposed financial test requirements pointed out that the test was designed for use by private corporations and not by municipalities or other governmental entities. In particular, the reliance of the test on measures of net worth makes it inappropriate for use by most municipalities since net worth is generally not a meaningful or readily measurable indicator of a government entity's ability to meet its obligations. Only for those special purpose municipalities, whose operations and accounting procedures are similar to those of a privately owned firm, is "net worth" a meaningful indicator of financial condition. Commenters also noted that the proposed financial test reporting requirements were inapplicable to those municipalities that do not file financial statements with the SEC or report their net worth to D&B.

As discussed in Section III.A.4., the Agency intends to propose a financial test for local government entities. Under this test, qualifying local government entities would be able to demonstrate that they are capable of self-insuring the costs of cleanup and third-party liability associated with UST releases, and thus do not need to obtain a separate financial assurance mechanism.

d. Miscellaneous Issues Concerning the Proposed Financial Test. In the preamble to the April 17, 1987, proposed Subtitle I financial test, EPA requested comments on two requirements under consideration for inclusion in the final rule: (1) a requirement that firms issue a binding written guarantee that they will pay for the corrective action and third-party obligations that they were assuring with a financial test or through provision of a guarantee or indemnity contract; and (2) a requirement extending the aggregate schedule beyond the required maximum for financial test users.

One commenter objected to the proposal to incorporate a binding written guarantee into the financial test criteria on the grounds that it could result in lower bond ratings for firms and increased interest costs on their debt, which in turn would impair firms' abilities to demonstrate financial assurance. Commenters also questioned whether such a guarantee would materially improve EPA's ability to obtain the required funding for UST obligations in the event of a firm's bankruptcy. In view of these comments, EPA has decided not to incorporate a requirement for a binding guarantee in the financial test provisions of the final rule.

With respect to extending the aggregate schedule for financial test users, some commenters considered that this provision would be unfair to large, financially viable firms who seek to assure their obligations with a financial test. The Agency's original intention in making such a suggestion was to limit the ability of financial test users to assure thousands of tanks on the strength of a limited net worth. Because the required aggregate is capped, it would be possible for a firm to add to the number of tanks it was assuring by means of the financial test without having to increase its required level of net worth. The Agency, however, has decided that extending the aggregate schedule is not necessary for financial test users assuring large numbers of USTs. As indicated above in discussing the aggregate schedule, those few firms that assure hundreds or thousands of USTs are also firms with resources that are substantial and more than sufficient to cover their obligations. Moreover, these same firms are likely to have good loss prevention programs to limit their potentially large liability.

Other comments received on the proposed financial test criteria included objections to the Agency's proposal to require, for purposes of the Subtitle I financial test, that an owner or operator add to the required UST aggregate any other environmental costs for which a financial test is used to demonstrate financial assurance. Commenters questioned why a ten times net worth multiple would be applied to the sum of these costs under Subtitle I, while under the provisions of the Subtitle C test, a six times net worth multiple is required for coverage of all costs being assured by a financial test.

The Agency believes that this addition of costs is necessary to ensure that an UST owner or operator can meet all of its environmental obligations without jeopardizing the financial health of the firm. The financial tests used for closure and post-closure care, liability coverage, and corrective action all rely on a measure of a firm's net worth relative to the costs being assured. If, therefore, these costs were not added together in the UST financial test for purposes of determining the required amount of net worth, UST owners or operators would, in effect, be "double pledging" their financial resources, thereby reducing the likelihood that UST obligations could be met if they were also faced with other environmental costs.

One commenter recommended that a firm owning or operating USTs and using a financial test to assure Subtitle C obligations should be required to have a tangible net worth equal to the sum of 10 times the applicable UST aggregate plus six times the applicable Subtitle C costs, rather than a tangible net worth equal to 10 times the sum of all costs assured by a financial test, as the Agency proposed. It was argued that this procedure for determining the magnitude of net worth coverage for multiple environmental obligations was more consistent with the Subtitle C financial test requirements, which use a six times net worth multiple. However, for reasons discussed in Section III.F.2.a. above, the Agency continues to believe that, for the purposes of the Alternative I financial test, a requirement that net worth coverage be fully 10 times all costs being assured by a financial test is necessary to maintain the level of protection that the Agency has set as the standard for the Subtitle I test. The Alternative II financial test, by contrast, requires that net worth coverage be at least six times all environmental costs being assured by a financial test. This lower net worth coverage is acceptable in the context of the Alternative II test because the test requires firms to meet other criteria indicative of financial strength that are not included in the Alternative I test.

Another set of recommendations received by EPA urged the Agency to make the Subtitle I test more consistent with the Subtitle C financial test. In one case, a commenter recommended that the Subtitle I test adopt the same procedure for calculating tangible net worth as is currently used for the Subtitle C test for closure and post-closure care (§264.151(f) and (g)). Under this procedure, any of the costs being assured by the test that have been incorporated in the measure of a firm's liabilities can be subtracted from the liability total and added to net worth. Because generally accepted accounting principles require that firms accrue as liabilities those future costs that are reasonably certain and measurable, those firms with known future environmental obligations are required to count these obligations as part of their liabilities. The net worth (or difference between total assets and total liabilities) of such firms will be decreased correspondingly by the amount of the accrued liability. Thus, generally accepted accounting procedures measure net worth as if known future obligations had already been paid for or discharged. However, the purpose of the net worth criteria in a financial test is to measure the net worth resources available to a firm before it incurs an environmental cost, and thereby to determine whether the firm can meet this cost without jeopardizing its ability to meet other unanticipated obligations. For the Subtitle C test, EPA therefore believed that the appropriate procedure for measuring a firm's available resources was to compute net worth before adjusting for those liabilities that the test is being used to assure. EPA believes that the same reasoning is applicable to the Subtitle I test and, therefore, allows in the final rule any UST costs that have been accrued as part of total liabilities to be subtracted from the sum of total liabilities and added back to net worth. The Agency has adopted this procedure for purposes of both the Alternative I and the Alternative II UST financial tests.

3. Summary of Changes in the Financial Test

As discussed in Section 2 above, the Agency has made a number of changes to the Subtitle I financial test, proposed on April 17, 1987, largely in response to the comments received on the proposal. These changes are briefly summarized below.

a. Alternative Financial Test Option. In addition to the originally proposed Subtitle I test, the Agency is allowing UST owners and operators who wish to use a financial test to meet the criteria of the Subtitle C test for liability coverage. Under this option, owners or operators, and/or guarantors, would be required to demonstrate the following:

- A tangible net worth of at least $10 million;

- A tangible net worth of at least six times the amount of the applicable UST aggregate;

- U.S. assets at least 90 percent of total assets, or U.S. assets at least six times the amount of the applicable UST aggregate; and either:

- Net working capital at least six times the applicable UST aggregate, or

- A current bond rating for the most recent bond issue of AAA, AA, A, or BBB as issued by Standard and Poor's, or Aaa, Aa, A, or Baa as issued by Moody's.

In addition, firms using this alternative must have independently audited financial statements and cannot have an auditor's adverse opinion, disclaimer of opinion, or going concern qualification. For those firms that do not file their financial statements with the SEC, the Energy Information Administration or the Rural Electrification Administration, a special auditor's report, which compares the financial information reported in the test submission to the firm's financial statements and certifies that there are no material differences between the two, is also required.

b. Disallowance of a Financial Test if a "Going Concern" Qualification Is Received on a Firm's Financial Statements. In the proposal, the Agency stipulated that, if the financial statements of a financial test user had been independently audited, they could not carry an adverse opinion by an independent certified public accountant or a disclaimer of opinion. In the final rule, the Agency has decided to add a "going concern" qualification to the types of auditor's opinions that will disqualify a firm from using a financial test. Because a "going concern" qualification indicates that there is a question about the ability of a firm to stay in business, the Agency does not believe such firms should be allowed to rely on their own resources to cover their UST obligations.

c. Reporting to the Energy Information Administration or the Rural Electrification Administration. The final rule allows utilities filing annual reports with the Energy Information Administration and rural electric cooperatives filing annual reports with the Rural Electrification Administration to use the financial test.

d. Listing of Locations of Covered USTs. The financial test, like all of the financial assurance mechanisms in the final rule, does not require identification of individual tanks at the locations assured by the financial test unless the financial test is only being used to cover some of the USTs at one location.

e. Extending the Deadline for Preparing the Financial Test. The final rule allows firms using a financial test 120 days from the end of their reporting year to prepare their UST financial test. In EPA's original proposal, the chief financial officer of the firm had to sign the financial test documentation within 90 days of the close of the fiscal year. The final rule also allows owners or operators who can no longer use a financial test 150 days from the end of the reporting year to obtain alternative means of financial assurance. In the event that an owner or operator fails to obtain alternative assurance, he must notify the Director of the implementing agency within 10 days. In the proposed rule, only 120 days were allowed to obtain an alternative mechanism.

f. Procedures for Determining Tangible Net Worth. In the final rule, the Agency has adopted the procedure for calculating a firm's tangible net worth from the Subtitle C financial test for closure and post-closure care. With this procedure, firms are allowed to deduct from their total liabilities any accruals for costs that are being assured by the financial test. This deduction can then be added to the measure of tangible net worth.

G. Guarantee (§280.96) and Indemnity Contract

The final rule, unlike the proposed rule, allows only one form of financial assurance by which a firm promises to pay the specified amounts for corrective action or third-party liability for another firm: a guarantee (§280.96). Indemnities, which were included in the proposed rule, are not authorized in the final rule. EPA based its decision not to authorize the indemnity on the following rationale.

Many commenters on the proposed rule noted that authorization of an indemnity as an allowable mechanism to provide financial assurance in this regulatory context would seem to endorse practices which, in the past, required some petroleum product marketers to indemnify their suppliers. Although the Agency's proposed authorization was not intended to endorse any other use of indemnities, the Agency believes that dropping the indemnity will prevent any possible misunderstanding.

Moreover, in order to cover third-party liability, indemnities duplicate so closely the structure and operation of a guarantee contract that, in effect, no additional financial assurance option is added by including indemnities. In fact, their inclusion may create unnecessary confusion because, in the petroleum marketing industry, indemnities have been used in a very different context. Commenters on the proposal indicated that, in the past, petroleum product marketers have often been required by their contracts to indemnify their suppliers, rather than looking to them for indemnities and guarantees. Finally, because the same kinds of firms are likely to be guarantors and indemnitors, indemnities do not provide the regulated community with an additional group of potential financial assurance providers. For these reasons, the Agency authorizes guarantees in today's rule but not indemnities.

A guarantee is a promise by one party (the guarantor) to pay specified debts or satisfy the specified obligations of another party (the principal) in the event the principal fails to satisfy the debts or obligations. Under the final rule, a guarantee may be provided by related firms or by unrelated firms that have a substantial business relationship with the owner or operator. The obligation between the owner or operator (the principal), the implementing agency, or third parties rests on regulatory requirements and potential tort liability. If the owner or operator fails to perform corrective action or satisfy certified third-party claims, the guarantor agrees to fund a standby trust from which the implementing agency will direct the payment of corrective action costs or third-party claims.

Guarantors must demonstrate that they are qualified to provide financial assurance by satisfying the Alternative I or Alternative II financial test under §280.95, described in Section III.F. Also, to ensure that state insurance laws do not call into question the enforceability or validity of the mechanism, the guarantee can be used only if it is certified as valid and enforceable by the Attorney General of the state where the USTs covered by the mechanism are located.

Many commenters questioned the availability of the guarantee, particularly to small and medium-size firms. These commenters were concerned that such firms would not have the required relationship with a potential guarantor or that a potential provider would be unable to satisfy the financial test requirements. EPA's proposed rule included guarantees among a variety of alternative mechanisms to provide owners and operators a number of compliance options. Although some segments of the regulated community will be unable to use the guarantee because of the rule's business relationship and financial test requirements, the Agency continues to believe these requirements are necessary to ensure that the guarantee provides adequate financial assurance. These provisions, therefore, remain unchanged in today's rule.

The proposed rule allowed firms to provide a guarantee if they were related firms that own a controlling interest in the owner or operator (parent firms), firms that own a controlling interest in a parent firm of the owner or operator (grandparent firms), or affiliated firms that are controlled by a parent that also owns a controlling interest in the owner or operator. As defined in §280.92(c), "controlling interest" means direct ownership of at least 50 percent of the voting stock. The proposal also allowed a firm engaged in a "substantial business relationship" with the owner or operator to provide a guarantee as an act incidental to that business relationship. These firms were included to increase the number of potential financial assurance providers without sacrificing the validity or enforceability of the instrument. Section 280.91(j) of the proposed rule defined a "substantial business relationship" to mean the business relationship necessary under applicable state law to make a guarantee issued incident to the relationship valid and enforceable. A guarantee is considered incident to such a relationship if it arises from and depends on existing economic transactions between the guarantor and the owner or operator.

These required relationships between owners or operators and providers of guarantees were the subject of many comments. Several commenters praised the Agency for expanding the number and kinds of corporate affiliates that are authorized to provide guarantees of financial assurance and urged even further broadening in recognition of the variety of corporate structures that exist within some sectors of the regulated community such as electric utilities. One commenter suggested the broader definition of corporate affiliates used in federal securities law, which would include any firm that, directly or indirectly, through one or more intermediaries, controls, or is controlled by, or is under common control with, the owner or operator.

EPA's concern is to ensure that guarantees from corporate affiliates are valid under appropriate state law and that sufficient unity of interest exists between the guarantor and the owner or operator to provide adequate assurance of financial responsibility. The proposed relationship requirements are those that seem most likely to result in adequate assurance. A firm engaged in a substantial business relationship with the owner or operator can, however, provide a guarantee regardless of its position within the corporate structure. Thus, the Agency will allow affiliates, such as those enumerated in the securities definition, that satisfy this criterion to provide financial assurance as guarantors.

The proposed rule required providers to use the contractual language specified in the rule for the guarantee. Some commenters expressed concern that the proposed wording of the guarantee instrument did not sufficiently limit the providers' liability, particularly in the event of the bankruptcy of the owner or operator. The Agency believes that the required language explicitly limits the obligation of the provider to the per-occurrence and aggregate amounts for corrective action and third-party liability as stated on the face of the instrument and that the wording, therefore, need not be modified. In addition, as discussed in Section III.V.2 of this preamble, the Agency is incorporating certain exclusionary language into the terms of the guarantee to more clearly limit the type and circumstances of third-party liability for which this mechanism can be used. A provider may, however, have incurred obligations outside those of the guarantee contract, under state law or other contractual agreements with the owner or operator. Such legal obligations will not be changed by the limitations in the guarantee.

H. Insurance and Risk Retention Group Coverage (§280.97)

1. Availability

Today's rule allows UST owners and operators to demonstrate financial responsibility through the purchase of insurance. The Agency believes that for many owners and operators, insurance will be the private mechanism of choice because it will be less costly and more available to most owners and operators than the other commercial mechanisms. Many commenters expressed concern, however, that insurance would not be readily available, and many felt that coverage, if available, would not be offered at the levels required by EPA and that it would not be available to particular groups of owners and operators.

The Agency recognizes that the liability insurance market, particularly the market for pollution liability coverage, has become restricted in recent years. As many commenters pointed out, a number of factors have contributed to the current limited availability of liability insurance.

The Agency also believes that despite the tight market, some insurance is available for USTs and more may become available in the near future. Evidence from the commenters suggests that UST coverage is currently available from a small number of specialty insurers, although some policies do not provide the level and scope of coverage required in the rule. One major provider of UST coverage insures over 80,000 tanks at 25,000 locations. A major insurance broker has obtained coverage for over 1,500 petroleum marketers with more than 90,000 tanks at over 26,000 locations. Effective July 1, 1987, the company that wrote policies for this broker stopped writing new policies or renewing existing policies. However, the broker is continuing to offer coverage through a RRG which has recently become licensed and which is currently offering policies. In addition to the petroleum marketers currently covered through existing policies, the RRG intends to extend coverage eventually to many of the 78,000 open dealers who currently find it difficult to obtain insurance.

Although UST insurance is most readily available to petroleum wholesalers and distributors, some non-marketers (e.g., auto dealers) have also been able to purchase coverage. Many insurance companies that do not specialize in pollution insurance nevertheless offer UST coverage to their policyholders who purchase other lines of commercial liability coverage. A major supplier of insurance to petroleum marketers also issues policies to non-marketers purchasing other liability lines. Three other major insurers also reported that they provide UST coverage to some non-marketers.

The market for UST coverage has improved somewhat since the financial responsibility regulations were proposed on April 17, 1987. Two new UST insurers have entered the market (one of whom offers coverage to non-marketers) and an existing insurer, who had provided coverage in only a few states, has expanded to offer coverage in all fifty states. This insurer also offers coverage to single station owners. Two insurers already offering other pollution liability lines have indicated that they are considering offering UST coverage as well.

The Agency is aware that the availability of coverage at the per-occurrence limits required in the statute and today's rule is limited. Recently, one major insurer lowered its per-occurrence limits from $1 million to $500,000. Its aggregate coverage levels remain at $2 million, enough aggregate coverage for owners and operators with any number of tanks to meet the aggregate requirement in the rule. The RRG discussed above has begun offering policies with $750,000 per-occurrence limits and plans to offer $1 million limits when it becomes sufficiently capitalized. In addition, a number of insurers not specializing in pollution liability coverage continue to offer coverage with $1 million per-occurrence limits. While some of these insurers offer aggregate limits of only $1 million, in most cases these insurers provide coverage to owners or operators with fewer tanks for whom $1 million would be adequate to meet the Agency's requirement. In some cases, owners and operators may have to combine policies and other mechanisms to obtain the required coverage.

While the current insurance supply is inadequate to cover all members of the regulated community, the Agency hopes that the supply will expand in the months between the promulgation of the regulations and the compliance dates for the majority of unassured USTs. As noted above, a slight expansion has already occurred. The requirement to demonstrate financial responsibility should significantly increase the demand by owners and operators for UST insurance. At the same time, promulgation of UST technical standards should increase the ability of the insurance industry to predict its risk in offering UST coverage. These two factors may increase the certainty of the profitability of insuring USTs and should encourage new entrants into the marketplace.

The Agency further believes that 12 to 18 months is a reasonable time in which to expect the insurance industry to respond to the increased demand for coverage and for alternatives to conventional insurance, like RRGs or state funds, to develop. Estimates of the time frames for establishing new insurance programs and RRGs range from 12 to 36 months. Commenters on the Supplemental Notice generally agreed with the estimates, with only one commenter suggesting that it might take as long as 5 years for a RRG to form.

Nevertheless, the Agency recognizes that some owners and operators may have difficulty obtaining insurance after the date set for compliance with the rule. In particular, individual service station dealers who are not part of an industry association may face such difficulties because UST policies are often sold through such associations, making it difficult for unaffiliated owners or operators to obtain insurance on their own. Individual service station dealers and other UST owners and operators not currently members of larger groups or trade associations may have to form or join a group to facilitate purchase of UST coverage or the formation of a RRG. Alternatively they may be able to rely on a state fund.

2. Insurance Cost and Its Impact

Many commenters felt that the cost of insurance for USTs would be prohibitively high and suggested that in considering the impact of the rule, the Agency had underestimated the cost of UST pollution liability policy premiums. Other commenters addressed issues concerning the high cost of insurance in general and felt that particular groups of owners and operators, especially small businesses and local governments, would be adversely affected by the regulations.

The Agency believes that its projection of average premium costs of $2,000 to $4,000 per facility is accurate. The estimate was developed based on current and projected premiums using data supplied by insurers. The information received in the comments supports this estimate. The proposed RRG noted above reported that its average premium for $1 million per-occurrence coverage is expected to be $2,000 per site. Other current providers reported premiums of $500 to $2,000 for coverage of one to twelve tanks. The largest average premiums were reported by the National Association of Convenience Stores (NACS) and the Society of Independent Gasoline Marketers of America (SIGMA). These trade associations reported average premiums of $13,600 and $32,000 per member respectively. NACS and SIGMA members tend to own several locations, however, and there is likely to be more than one tank at each location. Forty percent of NACS members own more than 10 stores, while 47 percent of SIGMA members own 11 to 50 outlets and 39 percent own 51 or more. Given the large numbers of sites covered, the high NACS and SIGMA average premiums are also in line with the Agency's original estimate.

Reported claims data suggest that UST claims have been predictable and not extremely costly. Most claims have been under $100,000. In addition, insurers can expect the risks of UST coverage to become more predictable in the future. While the cost of insurance for USTs could be relatively high initially, particularly when the regulations first go into effect, the increased predictability and decreased risk that the technical regulations are likely to promote should help to limit costs.

The Agency recognizes that the cost of liability insurance in general may pose a hardship upon some members of the regulated community. However, average premiums of about $2,000 are small compared to the costs of corrective action which, if incurred, would certainly pose a much greater economic hardship.

The Agency received several comments with specific suggestions for alternative requirements that might reduce the cost of obtaining insurance coverage for USTs. One commenter suggested that a tank manufacturer's product liability policy might be extended to provide indemnification for tank owners or operators. However, such a mechanism would present a number of difficulties in meeting the financial responsibility requirements. Among the difficulties would be setting a level of product liability insurance that would ensure indemnification of each tank purchaser at a level of $1 million. In addition, it is likely that the scope of product liability insurance coverage would be unacceptably low (e.g., it would only cover releases caused by tank defects). Also, administrative difficulties connected with securing payment through a manufacturer's policy might delay cleanup. For example, a claim might have to be made by first contacting the manufacturer who would then contact the insurer. Therefore, the Agency declines to authorize such a mechanism as a means of compliance with the regulations. The Agency recognizes, however, that tank manufacturers may act as guarantors for tank owners or operators provided that they comply with the applicable requirements of §280.96.

3. Viability of Risk Retention Groups

Commenters raised a number of issues concerning the viability of risk retention groups (RRGs) as an alternative to traditional insurance coverage. Among the issues were: difficulty of organization, cost of capitalization, instability of RRGs, and conflicts between current state laws and regulations and the Liability Risk Retention Act of 1986 (RRA), 15 U.S.C. 3901 et seq.

The Agency recognizes that forming an RRG requires considerable effort. Evidence from the comments suggests that it would take at least one year to establish a group. However, such groups are currently being organized to offer environmental impairment liability insurance. One of these RRGs is now offering coverage to a number of UST owners and operators, including owners of single outlets for retail motor fuel marketing.

A number of commenters were concerned that costs of capitalization could be high for RRGs. The Agency recognizes that capitalization costs could be a significant barrier to RRG development. At present, however, there is little evidence available to indicate what typical capitalization costs per owner or operator are likely to be. The recently formed RRG mentioned above requires a capital contribution of $2,000 or an amount equivalent to the annual premium, whichever is less. Premiums are currently around $1,600 per site and are expected to increase to about $2,000.

Broader questions of general RRG stability and solvency, along with issues concerning the regulation of RRGs by states, are questions connected with the RRA and go beyond issues directly related to financial responsibility for underground storage tanks. Therefore, it is not within the scope of this rulemaking to address these broader RRG issues. Such issues, however, are being addressed by other agencies of the federal government. The Commerce Department has recently issued a report evaluating the effectiveness of the RRA.(FOOTNOTE #6) The report found no major problems with RRGs themselves (in terms of solvency and potential risk to the public), but noted conflicts between state insurance laws and regulations and the provisions of the RRA. Such conflicts are matters for the states to address.

RRGs may be unavailable to some owners or operators due to an inability to organize into a group or raise the necessary capital. Regulation may also limit the formation of such groups in some states. While some UST owners and operators may be unable to form RRGs, however, the Agency believes the groups may provide an alternative to insurance for a number of owners and operators of USTs.

4. Specific Requirements for Insurance and Risk Retention Group Coverage

A number of commenters questioned specific policy conditions that insurance mechanisms must include under this rule. In general, commenters questioned the effect of these requirements on the availability of insurance. The Agency recognizes that the limited availability of insurance, in part, reflects the significant uncertainties regarding the risk that insurance providers may be undertaking and that various policy language has been developed to minimize uncertainty. Therefore, in specifying certain policy conditions the Agency attempted to meet two objectives: (1) the need to ensure that insurance coverage will provide the same level of protection as other mechanisms; and (2) the need to preserve flexibility in policy specifications to allow insurers to develop acceptable policies and to avoid unnecessarily constricting the availability of insurance.

a. On-Site Cleanup. Several commenters questioned the availability of insurance for on-site cleanup and suggested that financial responsibility for these costs not be required. The statute clearly requires financial assurance for corrective action. Corrective action involves cleanup of contamination caused by a release. While a release may, for an initial period of time, be confined to the property of an owner or operator of an UST, there is no way to ensure, without corrective action, that the release will not eventually affect the health or property of others. Financial responsibility for corrective action will ensure that cleanup may be undertaken promptly, thus minimizing third-party and environmental damage.

The Agency recognizes that some insurers are reluctant to provide on-site coverage because of the "moral hazard" involved. In other words, insurers fear that coverage of on-site corrective action could provide a disincentive to the owner or operator of an UST to maintain his site properly or may encourage negligence and thus may result in more releases and more claims to the insurance provider. Insurers also fear that coverage for on-site cleanup might make them responsible for the costs of routine maintenance or site restoration. First party coverage (i.e., coverage of damages to the insured) has traditionally been offered as a separate type of coverage.

Some insurers, however, provide on-site coverage in order to limit their exposure to more expensive third-party claims. Currently, the two primary sources of insurance for petroleum USTs cover on-site cleanup of UST releases. A recent entrant into the market also provides on-site cleanup coverage. In addition, some other insurance providers will cover on-site cleanup if it will prevent more costly third-party damages. The comments suggesting that on-site coverage is not generally available referred to policies covering environmental impairment liability in general and do not reflect the standard practice of the specialized market for UST coverage. The Agency received only one comment regarding the recent entry into the UST market of an insurer who will not cover on-site cleanup.

One commenter suggested that coverage for cleanup be mandated whether or not the corrective action is ordered by the government. Such a requirement could be interpreted to mean that policies must cover response actions that the owner or operator might perform as a general operating practice. Although the Agency is requiring that on-site corrective action be covered by all financial responsibility mechanisms, it does not intend to require policies that make insurers responsible for activities that are clearly the day-to-day responsibility of the owner or operator. Therefore, the Agency wishes to clarify that EPA is not mandating that acceptable insurance policies cover response actions that are part of routine maintenance of the tank site, site restoration and enhancement. Corrective action coverage will be required only for cleanup of releases required by §§280.60 to 280.66 and 280.72 of the technical standards or ordered by the implementing agency. The Agency believes that this requirement will ensure that adequate financial resources are available to perform necessary corrective action.

b. Non-Sudden Accidental Occurrences. Several commenters also suggested that insurance companies would not be willing to provide coverage for non-sudden occurrences as required by today's proposal. The statute requires, however, that all releases, whether sudden or non-sudden, be covered. This is particularly necessary to ensure adequate coverage for USTs, because it is often difficult to determine whether an UST release is sudden or gradual. Therefore, to ensure adequate protection of human health and the environment, both types of coverage are necessary. Comments indicate that coverage for non-sudden releases is currently offered by the major providers. In the event that an owner or operator could not obtain insurance for non-sudden releases, a separate mechanism could be used. Both mechanisms, however, must provide $1 million worth of coverage (see Section III.D.3).

c. Agency Specification of Various Policy Terms. A number of commenters from the insurance industry felt that EPA- proposed coverage terms did not precisely follow insurance industry standards and would limit availability of insurance coverage for USTs. However, it was also clear from industry comments that adoption of the recommended language would not, by itself, increase the availability of pollution insurance. The objections of the commenters centered on the definitions of the terms occurrence, accidental release, and bodily injury; on the prohibition of certain exclusions (those for non-sudden releases and on-site coverage); and the requirement that 120-day notice be given to an insured in the event of a cancellation. The commenters recommended that the Agency defer to standard industry practice in establishing policy language. One commenter suggested specific terms that he felt would more strictly define appropriate insurance coverage.

The Agency has two reasons for clearly delineating the terms of insurance policies that are acceptable to meet financial responsibility requirements. The first is that, given an insurance market with widely varying types and scopes of coverage, the Agency is concerned that the insurance provided to an UST owner or operator in fact provides a sufficient level of financial assurance. Second, because the Agency has mandated that proof of financial responsibility be demonstrated only in the event of a release or if specifically requested by the implementing agency, the Agency wants to define very clearly the terms of acceptable coverage so that both the insurer and the owner or operator can determine whether the policy is adequate to comply with the regulations.

Several commenters took issue with the Agency's use of the terms "occurrence" and "accidental release," preferring instead the combined term "pollution incident," a term widely used in the insurance industry. Commenters also suggested that the term "bodily injury" be defined in a manner consistent with the standard established in ISO's new CGL policy. These issues apply to all the instruments and have been addressed in Section III.C above.

Commenters also requested that the 120-day notification period for cancellation of insurance be shortened. The Agency agrees that a shorter time period will still give owners and operators adequate time to locate another mechanism for financial responsibility, and that the 120-day requirement may put too severe a burden on insurers by exposing them to the risk that the insured will fail to pay the premium in those 120 days. Thus, the 120-day notification period may limit the availability of UST insurance. The Agency is therefore shortening the notification period to 60 days (see also Section III.P below regarding cancellation of mechanisms). The notification period for other terminations of insurance policies has also been shortened to 60 days.

Commenters made a number of very specific recommendations regarding the terms of insurance policies. Several commenters suggested that acceptable policies be required to include a provision specifying that the insurer pay on behalf of the insured, rather than reimburse the owner or operator for cleanup costs or third-party damage payments. The Agency has considered these comments and has determined that specification that insurance policies pay on behalf of rather than indemnify the insured is not necessary to ensure that insurance will provide adequate assurance for corrective action and third-party liability costs. Many policies currently in use already specify that the insurer will pay on behalf of the insured, especially in cases of third-party liability. In some cases of corrective action, the implementing agency may undertake response activities to clean up a release in a timely manner. In such cases the implementing agency would receive reimbursement by the insurer.

One commenter recommended that lower premiums be mandated for tanks brought into compliance with tank performance standards in advance of their compliance dates. The Agency does not need to mandate particular premium levels because the market itself should respond to tank improvements by offering lower premiums for safer tanks.

d. First Dollar Coverage. Many commenters felt that the provision requiring policies that make insurers liable for amounts within the deductible applicable to the insurance policy would be unfair to insurers, and ultimately force them to bear the cost of the deductible. The Agency disagrees with these comments. The Agency developed this requirement to ensure that disputes (between the insurer and the insured) over who is responsible for paying amounts within deductible limits will not interfere with prompt performance of corrective action measures or with payment of third-party claims. The Agency does not intend to require policies that limit the right of insurers to specify deductibles applicable to particular policies and to receive these costs from insurers. Therefore, the first dollar coverage requirement should not hinder development of a pollution liability insurance market. If an owner or operator is in bankruptcy at the time of a release and therefore cannot pay the deductible, the insurer, as a creditor, could seek payment through the bankruptcy proceeding, just as any other creditor would.

Commenters suggested that the LUST Trust Fund might be used to guarantee payment of deductibles to the insurer. However, the statute establishing the LUST Trust Fund specifically defines those cases in which the Fund will pay corrective action costs and does not include payment of deductible amounts. In addition, the Trust Fund cannot be used to pay third-party damages.

Pollution liability policies frequently have high deductibles in order to keep premium costs down, and commenters suggested that paying amounts within these deductibles may not be affordable by the insured. The first dollar coverage requirement will prevent delay of cleanup or payment for third-party damages in such cases and will meet the Agency's goals of protecting human health and the environment. The insurer will still be entitled to recover costs within deductible limits from policyholders, although in such cases payment arrangements would have to be made.

e. Policy Retroactive Dates and Exclusions for Pre-Existing Conditions. Several commenters expressed concern that the Agency's acceptance of claims-made policies would limit protection of the insured and, consequently, the degree of financial assurance. Claims-made policies typically provide coverage only for releases reported during the policy period and that begin subsequent to the policy's retroactive date. The retroactive date is generally the same as the effective date of the policy.

One commenter suggested requiring the retroactive date to be 18 months prior to the effective date of the policy. The Agency understands the concern of the commenters and realizes that use of claims-made policies could result in occasional gaps in coverage, particularly with respect to releases occurring prior to the retroactive date. The Agency considered a requirement that claims-made policies have retroactive dates 6 months prior to the issue date of the policy but decided against such a requirement because few, if any, insurers are willing to offer such a policy. Given that insurance is likely to be the "mechanism of choice" of most UST owners and operators (especially smaller businesses), the Agency feels that its goals of protecting human health and the environment will not be served by specifying policy provisions which will prevent most otherwise qualified UST owners and operators from being able to obtain insurance. Prohibiting the use of claims-made policies or requiring a retroactive date prior to the policy effective date is likely to severely limit insurance availability.

In addition, the problem of gaps occurring in coverage prior to the retroactive date is likely to be a significant problem primarily at the outset of the UST financial responsibility requirements, when large numbers of previously uninsured owners and operators purchase insurance for the first time. After that initial time period, most owners or operators should be able to maintain continuous coverage, given the advance notice of cancellation that the Agency is requiring as well as the use of extended reporting periods for claims-made contracts. Extended reporting periods allow the insured to report a release occurring during the policy period after the termination date of the new policy. This "tail" coverage helps prevent gaps in coverage that could arise because the replacement policy will not cover releases that occur prior to the retroactive date of the policy. In the case of policy renewal as opposed to policy replacement, most policies should provide continuous coverage over time because the retroactive date of the policy is generally the original issue date and not subsequent renewal dates.

As the technical requirements for leak detection are phased in, owners and operators are likely to identify a number of USTs that are leaking and are not covered by a financial assurance mechanism. When the owners or operators of these tanks obtain insurance, these identified leaks are likely to be excluded from coverage as "pre-existing conditions." The Agency realizes that insurance is not appropriate to meet the cost of known releases and is not requiring that insurance policies purchased to comply with today's rule cover known pre-existing conditions. Any requirement for coverage of known conditions would be likely to severely limit UST insurance availability because insurers will not be willing to issue policies obligating payment for damages that have already occurred. UST owners and operators are responsible for cleanup and third-party liability costs that are not covered by financial assurance mechanisms. In some instances the LUST Trust Fund or state funding programs may be appropriate means to fund cleanup of those pre-existing conditions. (Under the LUST Trust Fund, however, owners and operators are liable for any funds expended to clean up pre-existing conditions.)

An insurance representative expressed concern that implementation of the technical regulations would result in discovery of more releases in the early years of the regulation and lead insurers to avoid the UST market until compliance with the technical regulations is complete. While it is likely that more releases will be discovered in the early years of regulation, this fact alone should not reduce insurance availability. Insurers will establish their own pre-conditions for tank coverage. Such pre-conditions may include inspections, audits or other measures to identify existing leaks. Tanks that are insurable are likely to remain so. Tanks that are discovered to be leaking are likely to need corrective action and appropriate repair, upgrading, or replacement before an insurer will accept them for coverage. These measures will also be required by the technical standards. Phased implementation of the technical requirements should not adversely affect insurance availability, because insurers will be able to require correction of existing releases as a condition for coverage.

f. Endorsement and Certificate of Insurance. The Agency received a number of comments regarding the specific wording of the Endorsement and Certificate of Insurance required for users of insurance and RRG coverage. All commenters on this issue agreed that the requirement that tanks be listed by identification numbers on the certificate of insurance or endorsement would result in more limited insurance coverage than the standard industry practice of listing covered tanks by site. As described in Section III.E.5, the Agency agrees with these comments. For the purpose of determining the appropriate aggregate coverage, however, a statement indicating that the mechanism assures 100 or fewer or more than 100 USTs is necessary. In today's rule, the endorsement and certificate language (§§280.97(b)(1) and 280.97(b)(2)) has been amended to strike the requirement for tank serial numbers and instead requires a listing of the number of tanks at each facility insured and the name and address of each facility.

Commenters also suggested that the issue date of the policy is unnecessary for the endorsement and certificate of insurance, given that the policy effective date, which defines the date on which coverage begins, is also required. The Agency again agrees with the commenters that inclusion of the issue date is unnecessary and that the scope of coverage provided is clearer when the endorsement and certificate of insurance contain only the effective date of the policy. In policies without an effective date, the issue date is considered to be the same as the effective date. However, in cases in which policies include effective dates, coverage is generally considered to begin on the effective date. In most cases, the issue date and the effective date of the policy will be the same, but in those cases in which they are not, the difference could be a source of dispute concerning whether a particular release is covered. Listing only the effective date on the endorsement and certificate will eliminate such a dispute. Today's rule does not include the issue date of the policy in the endorsement or certificate (§§280.97(b)(1) and (b)(2)), but does continue to require listing of the policy effective date.

g. Six Month Extended Reporting Period. As indicated in the April 1987, proposal, the Agency is concerned that a claims-made contract may leave gaps in coverage if, for example, a claim is reported after the expiration of a policy for a release that began prior to the expiration date. Such claims may not be covered by a replacement financial assurance mechanism (see retroactive date discussion, Section III.G.4.e above). Originally, the Agency proposed a one year "extended discovery" period to address this concern. Under this provision, claims made during the extended discovery period for losses that occurred during the policy period would be covered. In today's rule, the Agency has changed the term to "extended reporting period" and reduced the time frame to six months. These changes were made for several reasons.

Commenters suggested replacing the term "extended discovery period" with the term "extended reporting period" to clarify that the period only covers incidents which took place during the actual policy period and were reported during the extended reporting period. The Agency agrees with commenters that the insurance industry suggestion more accurately describes the coverage that the Agency intends. The Agency intends to require that only releases beginning during the policy period itself be covered during the extension and agrees with commenters that the term "extended discovery period" could cause confusion over whether a policy would cover occurrences beginning during the extended discovery period or only those beginning under the actual policy period and reported during the discovery period. Therefore, the Agency has changed the term to "extended reporting period." The Agency also agrees with the comment that it would be unnecessary to include an extended reporting period clause in an occurrence-based contract because by definition, such policies cover losses occurring during the policy period regardless of when they are reported. Therefore paragraph 2(e) of the endorsement and certificate of insurance (§§280.97(b)(1) and 280.97(b)(2)) are required only in the case of a claims-made contract.

The Agency also reconsidered the proposed one-year time frame for extended reporting. Several commenters addressed this issue. One suggested a reporting period of three years. Others urged that EPA should not establish a mandatory time frame. While the Agency recognizes that a three-year reporting period may afford even greater assurance by allowing an owner or operator more time in which to report damages caused by a release, the Agency has declined to mandate such a lengthy reporting period. Insurers are unlikely to be willing to offer "tail" coverage as long as three years due to the continuing risk to which such coverage would expose them. Also, even if insurers were willing to offer long reporting periods, the cost of the coverage could be prohibitively expensive. Because the Agency believes that an extended reporting period is essential to ensure adequate coverage by claims-made policies, the Agency has decided not to mandate a reporting period of such length that the insurance would be unavailable or unaffordable to otherwise qualified UST owners and operators. The significant reduction in insurance coverage created by such a provision would result in lesser protection of human health and the environment.

At the same time, the Agency does not believe that the length of the reporting period should be entirely discretionary. Therefore, the Agency has decided to set a shorter minimum length of six months for the extended reporting period.

The Agency has decided that six months is a reasonable time frame in which to identify and report a release following termination of a policy for the following reasons. First, implementation of leak detection requirements should result in prompt detection of releases. Six months should be sufficient time to report releases occurring during the policy period. The Agency is making such a reporting period mandatory for all claims-made contracts used to demonstrate compliance with today's rule, regardless of the reason for termination. Although the extended reporting period differs from the industry standard, it is important to bridge the potential gap between the end of a claims-made insurance policy and the initiation of another assurance mechanism.

Second, commenters estimated that the cost of the extended reporting period could range from half the premium cost to more than the cost of a yearly premium. This reflects the difficulty in establishing proof of when releases reported during this extension actually occurred. The Agency feels that the cost of a six-month period would be affordable for more owners or operators than the cost of a one-year period, thus increasing total insurance coverage. This is especially true because the owner or operator must also pay the cost of a new financial assurance mechanism to remain in compliance with the rule.

The change of the reporting period requirement from one year to six months may help to address two other issues raised by commenters. The first issue raised by commenters concerned potential conflicts over responsibility for coverage during the reporting period. A release discovered during the reporting period could either be covered by the old insurance policy if it began prior to policy termination or by the new replacement mechanism if it began later. There could be a delay in payment for corrective action and third-party damages while the date of the release was determined. As the reporting period was extended the potential for conflict would increase. By reducing the reporting period to six months, the Agency intends to minimize the potential for conflict between mechanisms and thus the potential for delay in meeting the costs of a release.

Second, members of the insurance industry noted that the extended reporting period required by the Agency differed from the reporting period in common use in the industry in that it was an "upfront" requirement, not an option to be purchased only in the event that a policy was canceled for reasons other than non-payment of premium. Insurers feared that mandatory reporting periods would expose them to the possibility of supplying coverage for one year to an insured who had not paid his premium, or who voluntarily canceled, thus essentially receiving "free" coverage for one year. The Agency wishes to stress that it is only requiring an extended reporting period during which insureds may report releases that occurred while their policy was in effect, not an extended coverage period during which insurers would be liable for releases occurring after the policy's termination. Insureds who voluntarily cancel their policies, therefore, would not receive "free" coverage for any period of time. Furthermore, by establishing an appropriate schedule of premium payment, insurers can best protect themselves against providing "free" coverage to insureds whose policies they ultimately would cancel due to nonpayment of premium.

One commenter recommended that forfeiture of insurance coverage due to delayed notice of a claim be prohibited. The Agency believes, however, that the extended reporting provisions of the rule adequately ensure that claims will be covered even if not reported immediately to the insurer. The reporting period would allow an insured covered by a claims-made policy extra time to report any releases which may have occurred during the policy period, but which were not immediately discovered.

h. Legal Defense Costs. The Agency's proposal to exclude legal defense costs from the coverage limits of insurance policies used to comply with financial responsibility requirements was opposed by many commenters. The commenters argued that insurers will not provide coverage exclusive of legal defense costs. The Agency has reviewed these comments and decided to continue to require exclusion of coverage for legal defense costs from insurance policy indemnity limits.

The exclusion was originally proposed for several reasons: (l) to ensure that legal defense costs would not absorb too great a portion of coverage limits and thus leave little coverage available for corrective action and third-party liability; (2) to conform to the general insurance industry standard practice for comprehensive general liability of paying all legal defense costs outside policy limits until the indemnity limits have been exhausted; and (3) to provide the same level of financial assurance to cover both third-party claims and corrective action as the other mechanisms (none of the other mechanisms for demonstrating financial responsibility under the rule covers legal defense costs).

In general, the above reasons for the exclusion are still valid. Legal defense costs could amount to a significant portion of policy limits now and in the future. A study by the ISO indicates that legal defense costs have increased three times faster than indemnity losses since 1960.(FOOTNOTE #7) Defense costs per one dollar of loss tripled between 1956 and 1984. This trend is not limited to any one particular area, but rather is common throughout the general liability field. There are few actual data on defense costs for liability suits brought in cases of pollution releases, but an Agency analysis of general liability, Superfund, and asbestos claims suggests that legal defense costs in cases involving pollution liability could constitute as much as 36 to 42 percent of policy liability limits.

The insurance industry standard for commercial general liability coverage continues to be payment for all legal defense costs outside general liability policy limits until the limits have been exhausted by indemnity payments. Only about 25 percent of commercial general liability policies include payment of legal defense costs within policy limits and ISO's standard CGL policy includes a clause obligating the insurer to provide payment for legal defense until coverage is exhausted by indemnity payments. EIL policies are more likely than CGL policies to include legal defense costs within policy limits; however, industry practice even within the smaller universe of EIL policies is not uniform. EIL policies are available that provide indemnity limits exclusive of legal defense costs.

The Agency recognizes that the insurance industry attitude toward legal defense costs may be changing. Some members of the industry, in response to the spiraling costs of legal defense, have begun examining ways to contain defense costs, feeling that the insurer's traditionally unlimited "duty to defend" may be a disincentive to policyholders to keep legal defense costs down. At the same time, it does not appear that the industry is moving toward inclusion of legal defense costs within policy limits as a solution to the problem. While ISO proposed at one time that some portion of legal defense costs be included within policy limits, it withdrew that proposal and has more recently put forward a plan to limit legal defense costs outside of policy limits.

Although the Agency's reasoning on costs of legal defense and standard insurance practice continue in general to hold true, EPA recognizes that legal defense costs are sometimes handled differently in the specialized market of insurance for USTs. The consensus of commenters is that insurance policies for USTs generally include legal defense costs within the policy limits. All policies issued through one major broker were written inclusive of legal defense costs. A number of other insurance providers similarly indicated that UST coverage would only be available if legal defense costs were included. One major insurer, however, has excluded, and will continue to exclude, legal defense costs from policy limits. Thus, while many current UST policies include legal defense in policy limits, the Agency does not feel that the exclusion or inclusion of legal defense costs will affect the availability of insurance coverage over the long term.

The Agency considered two other approaches to dealing with legal defense costs. The first would be to allow insurers to include legal defense costs within the limits. Because few UST insurers currently offer coverage exclusive of defense costs, this option would at least reinforce currently available insurance policies as a means of compliance with financial responsibility regulations. In addition, while it is clear that RRGs may cover legal defense costs (section 3901(a)(2)(A) of the RRA explicitly includes legal defense costs within the definition of allowable liability coverage), it is not clear that RRGs will generate enough capital to cover legal defense costs above and beyond policy limits. Inclusion of defense costs in the limits could facilitate RRG formation. The second approach would be to allow insurers to include legal defense costs within policy limits higher than the $1 million requirement. This approach would address insurer concerns regarding defense cost limitation, but probably would not address issues of RRG capitalization.

The Agency believes, however, that arguments for continued exclusion are compelling and that development of higher insurance policy limits allowing defense costs to be included would not guarantee that insurance would provide adequate financial assurance. The final rule continues to require that policy limits be exclusive of legal defense costs. The statutory requirement is $1 million of per-occurrence coverage for the costs of corrective action and third-party liability for USTs at facilities engaged in petroleum production, refining, or marketing. If insurance policy limits included defense costs, in effect, insurance policies would be providing financial assurance at a level lower than that required by the statute. Exclusion of legal defense costs from policy limits is also consistent with RCRA Subtitle C liability coverage regulations.

The Agency recognizes that in many cases legal defense costs may not be high enough to significantly affect the adequacy of insurance policies to provide the coverage required, particularly that for corrective action. However, if defense costs for petroleum USTs are low, then the insurance industry will not be excessively burdened if it must cover these costs outside of policy limits. Alternatively, if defense costs for petroleum USTs are high, then coverage for these costs outside policy limits is necessary to ensure adequate financial assurance for corrective action and third-party liability costs. While this may place a greater burden on the insurer, the insurer is free, as many insurers are currently doing, to limit defense costs in some way outside of policy limits.

i. Insurer Qualifications. The April 1987, proposal required that insurers eligible to provide policies in compliance with UST financial responsibility requirements be licensed to transact the business of insurance or as an excess or surplus lines insurer in each state where a covered UST is located. Commenters suggested that the proposed qualifications were too limiting and one commenter suggested substituting Department of Transportation regulations that allow insurers licensed or approved by a foreign government to provide coverage in addition to those licensed in any state or eligible to provide coverage as an excess or surplus lines insurer.

The Agency does not, however, feel that its qualifications for insurers are overly stringent. Foreign insurers offering coverage in the United States are generally licensed to provide coverage in at least one state which would, in most cases, qualify them to provide coverage as an excess lines insurer. Therefore, the EPA qualifications requirements should not necessarily prevent UST owners or operators from purchasing insurance from a foreign insurer. The Agency does not, however, wish to allow UST owners and operators to purchase insurance to meet financial responsibility requirements from an insurer who may not be a stable source of coverage. An insurer who is licensed only by a foreign government may not be subject to the same reserve requirements that help to ensure that an insurer can meet his obligations.

The Agency has, however, decided to make other changes to the qualifications for RRGs and insurers. Today's rule does not include separate qualification for RRGs and insurers as originally proposed, but instead imposes the same qualifications for both. Because a RRG is a type of insurer, it is simpler and more appropriate to delete the separate requirements for RRGs. The Agency has also decided to delete from the insurer qualifications the requirement that insurers be licensed or eligible in "each state where a covered underground storage tank is located." The final rule requires instead that insurers and RRGs be licensed to transact the business of insurance or eligible as an excess or surplus lines insurer in "one or more states." This change was made because the Agency decided that the proposed requirements might too severely limit insurance coverage available to owners and operators with USTs in more than one state. While the Agency continues to believe that it is essential that insurers and RRGs supplying financial assurance under today's rule be subject to adequate regulatory oversight, it believes that a requirement that insurers be licensed or eligible in one or more states will ensure that insurers and RRGs are sufficiently qualified to provide UST coverage. This ensures that the insurance provider meets the qualifications of the state in which it is writing policies. If a provider writes a policy for a large firm with USTs in more than one state, the provider must meet the eligibility requirements in the state where the firm buys the policy, but does not need to meet licensing requirements in every state where an UST may be located.

j. Other Comments. Commenters suggested specific changes regarding the manner in which insurance policies are interpreted by the courts, specifically, questions of joint and several liability and use of retroactive damages. These comments go beyond the scope of this rulemaking and are appropriately left to private insurance law. Note, however, that under RCRA §9003(h)(6), liability is strict, joint and several for government costs incurred in responding to a release of petroleum from an UST under section 9003(h).

Commenters also suggested that the potential for direct action against a provider of financial assurance would deter insurers from entering the market. The statutory provisions of RCRA section 9003(d)(2), however, specifically allow direct action against any provider of financial assurance. It is, therefore, beyond the authority of the Agency to prevent such direct action.

Other commenters suggested that private insurers provide guidance to states on the structure of state programs, that insurance be used to fill gaps in state fund coverage for third-party liability, and that EPA develop outreach programs and programs to encourage entry of private insurers into the market. The Agency agrees that private insurers can provide guidance on the structure of state funds and states may choose to consult with private insurers in the development of state funds. This rule allows several mechanisms and combinations of those mechanisms to achieve compliance. For example, traditional insurance may be used in combination with some other mechanism (like a state fund) to demonstrate financial responsibility.

To encourage the entry of private insurance carriers, the Agency is currently working with the insurance industry to develop a better understanding of the UST population and how UST insurance works. Several insurance companies currently provide UST coverage and there are indications that other insurers are planning to enter the market. In addition, the Agency believes that the implementation of the technical regulations will make UST risks more predictable and thus make the market more attractive to insurers.

I. Surety Bond (§280.98)

The final rule, like the proposed rule, allows owners or operators to use surety bonds to satisfy their financial responsibility obligations. Section 9003(d)(1) specifically lists surety bonds as mechanisms to be considered in establishing financial responsibility requirements. Several commenters expressed concern about the availability, terms, and costs of surety bonds. These commenters did not object to the use of surety bonds as a financial mechanism, but questioned whether owners or operators would be able to obtain surety bonds at a reasonable cost. They cited several factors affecting availability. Some commenters felt that surety companies would be reluctant to provide coverage because they believe the implementing agency would have absolute discretion over the control of the funds. For this reason, one commenter objected to the cancellation provision, which requires the surety to fund a standby trust in the event the principal fails to obtain an alternative mechanism and the Director of the implementing agency knows or suspects that a release has occurred. A large number of commenters stated generally that surety bonds will be unavailable for third-party liability and corrective action. Finally, some commenters stated that if surety bonds are available, only those companies able to meet the financial test could afford the bond. Along these lines, one commenter explained that, in attempting to meet the collateral requirements of a surety bond, petroleum marketers would reduce or eliminate their financial ability to purchase their products and equipment or to upgrade or monitor their equipment.

The agency recognizes that certain terms of the proposed performance bond (e.g., the cancellation provision) may limit the availability of the bond. The Agency believes, however, that the terms of the surety bond as proposed are necessary to ensure that coverage is available when needed to take corrective action and compensate third parties. For example, without the cancellation provision, sureties could cancel coverage when a release is suspected and the costs would be unfunded.

The commenters who objected to the discretionary authority of the Director of the implementing agency to control the funds appear to misunderstand the proposed regulations. The performance bond clearly describes the situations in which funds may be drawn; the Director does not have unlimited discretion to draw on the funds. (See also Section III.N of the preamble for discussion of the standby trust.)

The Agency acknowledges that many companies will be unable to afford surety bonds, or meet collateral requirements. EPA has authorized the use of those bonds in order to allow those persons who can secure surety bonds the option of using them to comply with these requirements. The rule continues to allow use of a surety bond.

In addition, as discussed in Section III.V.2. the Agency is incorporating certain exclusionary language into the terms of the instrument to more clearly limit the type and circumstances of third-party liability for which this mechanism can be used.

J. Letter of Credit (§280.99)

The final rule, like the proposed rule, allows owners or operators to use letters of credit to satisfy their financial responsibility obligations. Section 9003(d)(1) specifically lists letters of credit as a mechanism to be considered in establishing financial responsibility requirements. Many commenters on this mechanism did not object to the use of letters of credit, but were concerned about whether this mechanism would be available. For example, many commenters believed that letters of credit are not viable options for smaller entities. Commenters pointed out that smaller companies cannot meet collateral or liquidity requirements necessary to obtain letters of credit.

Other commenters pointed out that the costs of letters of credit are much higher than the costs of insurance, and that tying up capital or collateral to purchase letters of credit would prevent owners or operators from using letters of credit to purchase equipment for their businesses, including monitoring equipment and equipment for upgrading or replacing tanks. One commenter noted that the letter of credit would be unavailable to many governmental bodies because some lending institutions refuse to issue them to governmental bodies, and some city codes prevent governmental entities from securing letters of credit.

The Agency acknowledges that the collateral requirements for letters of credit may approach or exceed the face value of the letter of credit, and will be prohibitively expensive for many owners and operators. The Agency is allowing the use of letters of credit, however, as an option for those owners and operators who can afford them.

One commenter objected to the language in the letter of credit because he believed that it requires the issuer to examine the legitimacy of the conditions precedent to presentation of the sight draft. This commenter suggested that the sight draft and the statement that the Director of the implementing agency must provide to the bank should identify the purpose for which the letter is being issued (corrective action and/or third-party liability for sudden and/or non-sudden releases). This commenter also suggested that these documents should specify the tank identification number and name and address of each facility location.

The letter of credit does not require the issuer to examine the legitimacy of the conditions precedent to presentation of the sight draft. The letter of credit is payable upon presentation of a sight draft and a signed statement certifying that the letter is payable pursuant to these regulations.

A number of commenters, in addressing specific mechanisms, disagreed with the proposed requirement to identify individual tanks that are assured by the mechanisms. They all felt that identification of the facilities covered by the mechanism would ensure that releases from the facilities are covered, without delays and needless paperwork to determine which tank was the source of the release. The Agency agrees, and has revised the language of the mechanisms to specify coverage by facility, rather than by individual tank. Individual tanks must be identified if separate mechanisms are being used to cover different USTs. The letter of credit does allow the parties to specify the purpose for which the letter is being issued ("corrective action" and/or "compensating third-parties for bodily injury and property damage").

In addition, as discussed in Section III.V.2., the Agency is incorporating certain exclusionary language into the terms of the instrument to more clearly limit the type and circumstances of third-party liability for which this mechanism can be used.

K. Use of State-Required Mechanisms (§280.100)

EPA proposed that, in those states that have not obtained UST regulatory program approval, UST owners and operators may use state-required financial assurance mechanisms to meet the federal financial responsibility requirements. However, the proposed rule required the EPA Regional Administrator to determine that such mechanisms provide assurances that are at least equivalent to those of mechanisms specified in the federal requirements.

Several commenters noted that allowing use of state-required mechanisms will do little to help UST owners or operators because not all states have established or will establish their own financial responsibility requirements. Another commenter supported EPA's proposal that state-required mechanisms used to determine financial responsibility while EPA reviews the state program will be considered to be at least equivalent to other required mechanisms and thus in compliance with Subpart I for the amount and types of costs covered by the mechanisms.

In response, the Agency agrees that some states without authorized UST programs may not have state-implemented financial responsibility requirements for USTs. However, owners or operators in states that do not have authorized programs, but which do have financial responsibility requirements, will be able to use equivalent state-required mechanisms. These owner or operators will not have to procure additional mechanisms to satisfy the federal requirements. The final rule regarding the use of state-required mechanisms retains the language in the proposed rule.

L. State Fund or Other State Assurance (§280.101)

EPA proposed that UST owners or operators may use state funds or other state assurance programs to meet the financial responsibility requirements. RCRA Section 9004(c)(1) authorizes the use of "corrective action and compensation programs administered by state or local agencies" as mechanisms to provide evidence of financial responsibility for state program approval.

Although several commenters supported the use of state assurance programs as an acceptable financial assurance mechanism, commenters remarked that state assurance programs are generally not available and, even where available, often do not provide sufficient coverage. Several states remarked that they did not plan to establish funds or that the federal government should not rely on states to demonstrate financial responsibility for UST owners and operators.

The Agency recognizes that state assurance programs are not widely available to date. However, funds have been established in several states, including Virginia, Delaware, and Minnesota. Other states are also in the process of attempting to establish funds. The Agency does not require any state to establish an assurance program.

In addition, EPA is aware that state assurance programs may not provide complete financial responsibility for UST owners or operators. For example, funds may not cover third-party compensation or all corrective action costs. Therefore, UST owners and operators using these types of programs must use other financial assurance mechanisms in combination with a state fund to demonstrate compliance with the financial assurance requirements.

Several commenters suggested that states use particular program structures or particular financing mechanisms. For example, several commenters suggested that state funds cover corrective action costs above $100,000 and third-party compensation costs above $300,000, up to $1 million per occurrence. Other commenters suggested that state funds be structured to encourage entry of private insurers into the UST insurance market.

The Agency believes that the structure and means of financing programs is at the discretion of each state. EPA will not dictate the approach states should take in establishing assurance programs. However, for those states interested in establishing assurance programs, EPA will provide assistance in designing and evaluating such programs. In addition, EPA has developed a handbook providing guidance on establishing state assurance programs.

The Agency also does not intend to mandate a particular program structure in states that currently use funds to cover UST release costs. For example, the Agency would not require a state with a fund that only covered corrective action costs to alter its fund structure (e.g., to add coverage for third-party compensation) in order to qualify under this section. The owner or operator would have to obtain additional assurance to cover third-party liability requirements.

M. Trust Fund (§280.102)

A trust fund was not included in the proposed rule as an allowable financial assurance mechanism. As stated in the preamble to the proposed rule, the Agency believed that a trust fund with a pay-in period would provide inadequate financial assurance early in the period, and a fully-funded trust fund would be unaffordable to the owners or operators most likely to need to use the trust fund. Moreover, the Agency felt that a trust fund used in combination with an insurance policy would probably be more costly than paying the additional premium for first-dollar insurance coverage because: (1) unlike the costs of other mechanisms, trust fund deposits are not business expenses for federal tax purposes; and (2) insurance policies for USTs may be written to include coverage of a deductible that is later recovered from the insured.

The Agency received a comment requesting that a trust fund be allowed as a financial assurance mechanism. This commenter maintained that some firms may wish to use a trust fund to cover multiple tanks if other mechanisms are not available, and advocated allowing either a fully-funded trust fund or a partially-funded trust fund if combined with another mechanism that provides the remaining amount of required coverage.

In light of this comment, the Agency decided to allow trust funds in the final rule. Although the Agency believes that trust funds will in general cost more than other mechanisms and in many cases will be unaffordable, trust funds are allowed to provide more flexibility to owners or operators in providing financial assurance. To ensure that the trust fund will provide adequate financial assurance, the Agency requires the trust fund to be fully-funded for the amount of required coverage, or partially-funded and used in combination with another allowable mechanism that provides the remaining amount of required coverage.

The language of the trust fund instrument is identical to the language of the standby trust fund used to manage funds paid from other mechanisms (e.g., letter of credit). The amount of the trust fund is determined by the owner or operator, as long as the remaining amount of required coverage is provided by another mechanism.

In addition, as discussed in Section III.V.2. of the preamble, the Agency is incorporating certain exclusionary language into the terms of the instrument to more clearly limit the type and circumstances of third-party liability for which this mechanism can be used.

N. Standby Trust Fund (§280.103)

Under the proposed and final rule, EPA establishes the standby trust fund as the depository mechanism that an owner or operator must put in place upon acquiring one of the following financial assurance instruments: guarantee (§280.96), surety bond (§280.98), or letter of credit (§280.99). Funds drawn under any of these instruments, pursuant to the instruction of the Director of the implementing agency, must be deposited directly into the standby trust fund by the institution making the payment. The use of a standby trust is necessary because without such a depository mechanism, any funds drawn under those instruments that are payable to the Regional Administrator would have to be paid into the U.S. Treasury and could not be used specifically to pay for the UST corrective action or third-party liability claims for which the funds were intended without Congressional action (see 31 U.S.C. 3302). Similarly, funds payable to the state Director may have to be paid into the state treasury.

The rule requires that the trustee must have the authority to act as a trustee and its trust operations must be regulated and examined by a federal or state agency. This trustee qualification requirement is the same as the trustee qualification requirement under the Subtitle C regulations. If the trust operations are not regulated and examined by a federal agency, the trust operations must be regulated and examined by a state agency in each state in which a standby trust fund is established.

All commenters on the proposed standby trust requirement argued that the provision is unnecessary. In the case where a guarantee is used to provide financial assurance, several commenters asserted that the use of the guarantee is comparable to self-insurance, which does not require a standby trust because, in each instance, funds are assured from existing corporate assets. The Agency recognizes that corporate assets are the source of the funds for both self-insurance and guarantees, but does not believe that the similarity obviates the need to establish the standby trust when a guarantee is used to provide financial assurance.

The standby trust fund is necessary to ensure access to funds when they are required and to ensure that the implementing agency can address corrective action requirements promptly and preclude further damage to health or the environment.

The financial test of self-insurance is a direct mechanism for providing financial assurance. When it is used, the owner or operator ensures that he will take prompt corrective action and pay valid third-party claims from existing corporate assets -- evidenced by satisfaction of the financial test.

A payment guarantee, such as the guarantee in the proposed rule and today's rule, is an indirect mechanism. When it is used, the guarantor does not ensure that it will take prompt corrective action or pay third-party claims if the owner or operator does not. Rather, the guarantor contracts with the implementing agency that, if the owner or operator fails to undertake required activities, the guarantor will provide the necessary funds to undertake the activities from its corporate assets. EPA cannot hold the funds directly because of the prohibitions of 31 U.S.C. 3302, as discussed above. It is necessary, because of the prohibition, that the funds be placed in an existing depository mechanism, the standby trust, from which the implementing agency can direct funding of required actions as promptly as possible. Therefore the standby trust requirement for a guarantee remains a provision of today's rule.

Other commenters disagreed with the provision that the standby trust must be established at the same time as the financial assurance mechanism, noting that, under RCRA Subtitle C, the trust is established only when assured funds are required. The commenters misstate the requirements of Subtitle C. The standby trust requirement in today's rule differs from the Subtitle C model because its purpose is different. In the Subtitle C rule, guarantees are recognized to assure funds for closure and post-closure and third-party liability. No standby trust is required for the guarantee for liability because valid third-party claims, if not paid by the owner or operator, are paid by the guarantor directly to the claimants. If an owner or operator fails to perform closure or post-closure care whenever required to do so, the guarantor can perform the required activities itself or establish a trust from which EPA can fund the activities. Today's rule provides financial assurance for both corrective action and third-party liability. A release from an UST may or may not occur. If a release does occur and corrective action is necessary, it should not be delayed while a standby trust is put in place. Prompt action will prevent further damage to human health and the environment. In addition, because under Subtitle I one assurance mechanism covers both corrective action and third-party liability, the standby trust provides a mechanism for the Director of the implementing agency to ensure that funds are available first to pay for corrective action (see Section III.S). The Agency, therefore, has not changed the requirement that a standby trust be established when a guarantee, letter of credit, or surety bond is acquired to provide financial assurance in compliance with this rule.

The wording of the standby trust agreement must be identical to the wording provided by §280.103(b). Uniform wording of the agreement minimizes the administrative burden on the implementing agency by eliminating case-by-case review of standby trust agreements and provides owners and operators with the assurance that the agreements will satisfy the regulatory requirements. In addition, as discussed in Section III.V.2. of the preamble, the Agency is incorporating certain exclusionary language into the terms of the instrument to more clearly limit the use of the mechanism only to costs associated with releases from USTs.

Commenters on the standby trust were also concerned about the costs of trusts, particularly if the owner or operator has several facilities in several states for which standby trusts must be established and maintained. The Agency evaluated the costs related to establishing and maintaining a standby trust fund when today's rule was proposed. The primary costs are the costs of managing the funds; other relatively minor costs include the administrative fee charged to establish the trust fund and fixed fees for simply maintaining the account. The incremental costs of establishing a standby trust at the time the instrument is established will be minimal, since there will be no funds in the trust. The Agency believes, therefore, that the requirement to establish the standby trust fund at the time a financial assurance instrument is acquired will not be particularly burdensome to UST owners or operators.

In addition, the final rule allows the owner or operator to establish one trust fund as the depository mechanism for all funds assured in compliance with this rule. Owners and operators with a number of facilities in various states may, therefore, establish one standby trust into which funds can be deposited if and when required. States authorized to implement this program may adopt this policy or may require the owner or operator to establish a standby trust in their own jurisdictions.

O. Substitution of Financial Assurance Mechanisms by an Owner or Operator (§280.104)

Under §280.104 of the proposed and final rule, the Agency allowed an owner or operator to substitute alternate financial assurance, provided that an effective financial assurance mechanism or combination of mechanisms that satisfy the financial responsibility requirements existed at all times. After obtaining alternate financial assurance, an owner or operator may cancel a financial assurance mechanism by providing notice to the provider of financial assurance. The owner or operator must maintain continuous coverage with a financial assurance mechanism to ensure the availability of funds at all times for corrective action and third-party liability claims, should a release occur from an UST containing petroleum.

The Agency received no comments on provisions regarding the substitution of financial assurance mechanisms by an owner or operator, and thus promulgates these provisions as proposed.

P. Cancellation or Nonrenewal by a Provider of Financial Assurance (§280.105)

1. Length of Notice Period

In the April 17, 1987, proposal, the Agency required insurers to provide owners or operators 120 days notice before canceling (i.e., failing to renew) insurance coverage and 90 days before terminating a policy under other circumstances (e.g., non-payment of premium by an insured). Other providers of financial assurance were permitted to cancel, refuse to renew, or otherwise terminate an instrument only if the provider first notified the owner or operator at least 120 days in advance. Further, EPA required any owner or operator failing to obtain an alternate mechanism within 60 days after receiving a notice of cancellation or termination to notify the implementing agency of such failure and submit evidence of the existing financial assurance mechanism, the name and address of the provider of financial assurance, and the date of cancellation. In the sixty days remaining until termination of coverage, the implementing agency would then have the opportunity to inspect the affected tanks to determine if any releases had occurred, thus assuring that the still viable mechanism could be drawn upon to provide any necessary funds. Moreover, the 120-day requirement reflected the Agency's concern that providers of financial assurance might want to cancel their mechanisms upon the discovery of an UST release, leaving the owner or operator without assurance when it is most needed.

Several commenters, primarily from the insurance industry, urged EPA to reduce the number of days' notice required for cancellation to 60 days. The commenters presented several arguments supporting their request. First, they argued that 60 days is an adequate amount of time for owners or operators to search for and obtain any other type of available assurance, or to determine that none is available and report this to the implementing agency. Second, commenters noted that a 60-day notice period is becoming a standard insurance practice in many states. Third, commenters viewed the 120-day provision as punitive to insurers, and predicted that reducing the notice period to 60 days would result in the greater availability of affordable coverage. Finally, two commenters warned that if 90 days or more notice were required, insurers would automatically send out cancellation notices on an annual basis to every insured party, thereby giving them the time to review accounts at a point closer to the beginning of a new policy year.

Based on these comments, the Agency has concluded that the 120-day notice period is unnecessary for insurance, RRG coverage, and state fund coverage. In the 60 days following an owner's or operator's determination that no other financial assurance is available, the Director of the implementing agency has the authority to require a guarantor, surety, or issuer of a letter of credit to fund a standby trust. However, the Director of the implementing agency does not have the authority to require insurers, RRGs, and state funds to fund a standby trust should a leak be suspected or confirmed. Consequently, an additional 60-day period following the determination by an owner or operator that no alternate financial assurance is available would not benefit an owner or operator using insurance, RRG coverage, or state fund coverage in the manner intended by the Agency.

Other circumstances unique to insurance, RRG coverage, and state funds also support the conclusion that a 120-day notice period for cancellation is inappropriate for these mechanisms. In cases where insurance or RRG coverage is canceled, for example, an owner or operator has an incentive to submit any claims if there is a release. In addition, the extended reporting period for claims-made policies allows an owner or operator to file a claim six months after the policy has been canceled. Finally, states are not likely to abruptly withdraw financial assurance in case of an UST leak.

Consequently, EPA has decided that providers of insurance, RRG coverage, and state-backed coverage need only provide a 60-day notice period for cancellation or termination of coverage. Owners or operators who fail to obtain alternate coverage after these mechanisms are canceled are still required to notify the implementing agency 60 days after being notified of cancellation or termination of financial assurance (i.e., when coverage expires). Reporting at this time can trigger an evaluation of the USTs for releases which should be reported during the extended reporting period.

Nevertheless, the Agency, for the reasons noted above, believes that the proposed 120-day period is essential in cases where an owner or operator has obtained a guarantee, letter of credit, or surety bond. Therefore, providers of these financial assurance mechanisms must still provide a 120-day advance notice of cancellation or termination of coverage.

2. Termination for Non-Payment of Premium

A number of commenters, primarily from the insurance industry, argued that the provisions should allow for a quick termination of coverage in the event of non-payment of premium by an insured. Most suggested that this period be 10 days. Under the proposed provisions, commenters noted that the insurance agent or insurer would have to provide 90 days worth of coverage on behalf of an insured who fails to pay his premium. Some commenters warned that should the 90-day period be maintained in all cases, they might protect themselves from this contingency by requiring full payment of premium prior to the issuance of coverage. Moreover, commenters asserted that termination with 10 days notice for non-payment of premium conforms with standard industry practice on other types of insurance.

While sympathetic to industry concerns, EPA is unwilling to accept a 10-day notice period in these cases. First, the Agency calculates that such a brief notice period will not allow UST owners or operators sufficient time to obtain alternate assurance mechanisms, and hence will result in unacceptable gaps in coverage.

Second, the Agency remains convinced that the shortened 60-day notice period will fulfill the needs of providers. As noted earlier, a 60-day notice period is standard in many states. In addition, insurers, for example, could protect themselves by establishing an appropriate schedule of premium payment. Insurers could require payment 90 days before the expiration date of coverage for the maintenance or renewal of the policy. An insurer could then terminate the policy with 60 days notice if an insured does not meet the schedule of payment within 30 days of the premium due date.

The Agency therefore is requiring a 60-day notice period for termination of coverage even in the event of non-payment of premium by an insured.

Q. Reporting by Owner or Operator (§280.106)

The April 17, 1987, proposal required each UST owner or operator to keep evidence of financial responsibility at his UST site or at his place of business. (Section III.R of this preamble describes the nature of the records that the owner or operator must maintain.) In addition, the proposed rule required an owner or operator to submit the appropriate documentation of financial responsibility to the implementing agency in the following circumstances:

(1) When the owner or operator notifies the Regional Administrator of the existence of a new petroleum underground storage tank under §280.22;

(2) Within 30 days after the owner or operator has a known or suspected release from a petroleum underground storage tank required to be reported under §280.74;

(3) If the owner or operator fails to obtain alternate coverage as required by this subpart within 30 days after the owner or operator receives notice of:

- Commencement of a voluntary or involuntary proceeding under Title 11 (Bankruptcy), U.S. Code, naming a provider of financial assurance as a debtor,

- Suspension or revocation of the authority of a provider of financial assurance to issue a financial assurance mechanism,

- Failure of a guarantor to meet the requirements of the financial test, or

- Other incapacity of a provider of financial assurance;

(4) If an owner or operator is unable to obtain alternate assurance within 60 days after receiving a notice of termination of a mechanism, as required by §280.105(b); or

(5) If the owner or operator using the financial test fails to meet the requirements of the test, as required by §280.94.

The Agency received several comments supporting the proposed reporting requirements. Two commenters, both representative of large segments of the regulated community, noted that an annual reporting requirement would impose excessive administrative burdens on small businesses. Moreover, a number of state government commenters expressed concern that they might be unable to administer a mandatory reporting requirement. The commenters supported their position by citing the large size of the regulated community, the lack of state financial and personnel resources, and the excessive paperwork burdens that would accompany such an effort.

Other commenters, however, urged EPA to mandate more extensive reporting requirements. Two commenters suggested an annual demonstration of financial responsibility. The commenters cited several benefits of enhanced requirements, including: (l) greater incentives for proper tank management and rapid release detection and response; (2) the Agency's ability to target enforcement efforts towards owners or operators who fail to submit evidence; and (3) greater assurance that funds will be available to pay the costs of UST releases.

There are other potential advantages of more stringent reporting requirements. Stringent reporting could increase the level of compliance with the regulations, since owners or operators would be required to demonstrate on an annual basis that they have obtained financial assurance required under this subpart.

Despite these considerations, the Agency has decided that the advantages of more frequent reporting are outweighed by several factors unique to the UST financial responsibility program. First, the regulated UST community, consisting of an estimated 1.7 million USTs located at 500,000 facilities, is extremely large. Receiving and processing financial assurance certifications from all these UST owners or operators on an annual basis could place substantial administrative burdens on implementing agencies. In fact, the sheer volume of reports could overwhelm implementing agencies and mask the more critical information, i.e., cancellation or release notices. However, the Agency intends to develop non-traditional approaches to compliance monitoring and enforcement and will initiate pilot projects in states to test these approaches.

In addition, provisions in SARA for the LUST Trust Fund create incentives for owners and operators to comply with the regulations, since the fund may be used to pay for costs in excess of the required amount of financial responsibility if the owner or operator has maintained evidence of financial responsibility. To increase awareness of and compliance with UST rules, EPA is preparing a public outreach program aimed at providing UST owners and operators with information on all UST requirements. Moreover, many UST owners and operators are already obtaining insurance to limit their exposure to future liability due to UST costs.

Finally, the alternative of reporting by postcard, while minimizing costs for owners and operators, would still inundate implementing agencies with the same number of reports, and thus would not alleviate the critical problem created by annual reporting.

The Agency has thus decided not to impose more stringent reporting requirements on the regulated community.

The Agency also received comments opposing certain provisions of the proposed reporting requirements. Several commenters disagreed with the requirement to submit financial responsibility documentation for new, and not old, tanks, arguing that new tanks are less likely to leak than older tanks.

The Agency has retained this provision in the final rule. As noted above, the proposed requirement builds upon existing notification requirements mandated under Section 9002(a) of Subtitle I and codified in the UST technical standards (53 FR 37082, September 23, 1988). Specifically, §280.22 requires owners or operators who bring a new tank into use to notify the appropriate state or local agency or department of the existence, age, size, type, location, and uses of the new tanks as well as to obtain an installation certification. Including financial assurance information in these reports involves a minimal increase in the cost of these reports for the regulated community and provides valuable compliance monitoring information to the implementing agency.

Another commenter argued that owners or operators should not be required to submit financial assurance documentation for new tanks to both the EPA Regions and the states. The Agency agrees with the commenter. While the proposed rule required owners or operators to submit this documentation to the Regional Administrator, today's rule relies on submittal of the new tank notification to the appropriate state or local agency or department, as required in §280.22 and RCRA Section 9002(a).

Another commenter found the wording of §280.106(a)(2) unclear, and inquired whether financial responsibility documentation should be submitted for a suspected release or only in the event of a confirmed release. The financial assurance reporting requirements, which have been revised to reflect provisions for reporting releases for corrective action in §§280.53 and 280.61 of the UST technical standards, now require submittals in the event of confirmed releases. (These provisions are discussed in further detail in Section IV.F of the UST technical standards preamble.)

The same commenter urged EPA to allow entities installing large numbers of tanks the option of submitting financial responsibility documentation annually to the Regional Administrator rather than submitting multiple documentation for each new tank. The Agency sees no reason to adopt this approach. Section 280.22 requires that owners or operators certify in the new tank notification form that they are in compliance with the financial responsibility provisions as well as provide information on compliance with other technical requirements.

R. Recordkeeping (§280.107)

Under the proposed rule, owners or operators were required to maintain evidence of all financial assurance mechanisms used to demonstrate financial responsibility under this subpart until one year after closure or one year after the completion of closure and corrective action. An owner or operator was required to maintain at his UST site or place of business the following types of evidence for mechanisms used to demonstrate financial responsibility:

(1) Copies of assurance mechanisms specified in §§280.94-280.100, worded as specified.

(2) Letters of certification from the chief financial officer of firms using the financial test of self-insurance or providing guarantees, based on year-end financial statements for the last completed fiscal year. Such evidence must be on file no later than 120 days after the close of each fiscal year.

(3) Originally-signed duplicates of the standby trust funds worded as specified in §280.103(b) for guarantees, surety bonds, or letters of credit.

(4) Originally-signed duplicates of the insurance policies or RRG coverage policies with the endorsements or certificates of insurance and any amendments.

(5) Copies of letters or certificates from states regarding coverage by state funds or other state assurances.

The proposed rule also required the owner or operator to maintain a certification that the financial assurance mechanism used to demonstrate financial responsibility is in compliance with the requirements of the rule.

The Agency received a number of comments concerning the recordkeeping requirements of owners or operators of petroleum USTs. Some commenters expressed unconditional support for the provisions.

Several commenters, however, were dissatisfied with the requirements. One commenter urged EPA to delete the recordkeeping requirements and instead require owners or operators to submit evidence of financial responsibility directly to the Agency. Since the Agency, as noted in Section III.Q, does not require the automatic submission of financial responsibility documentation, it has decided to retain the recordkeeping requirements under §280.107.

Another commenter suggested that the certification of compliance be kept at the UST site, rather than at the place of business, and that it include the address of the corporate office where details would be maintained. The provisions of this section allow UST owners or operators to choose this recordkeeping option. However, as with the technical standard rule, off-site records must be made available on request of the implementing agency.

One commenter noted that compiling the annual letter from the chief financial officer supporting the use of financial tests or guarantees is unnecessary. The commenter suggested that this annual letter should not be required, especially since the certification of financial responsibility presents essentially the same information. Another commenter asserted that the certification of financial responsibility is unnecessary.

The Agency has decided to retain both requirements. Because EPA is not receiving financial responsibility reports on a regular basis, the Agency believes that requiring an annual letter from the chief financial officer may be necessary to further ensure the validity of various financial responsibility mechanisms. Moreover, the Agency notes that large firms, as a matter of standard business practice, routinely maintain the information required in the annual letter. Similarly, requiring the certification of financial responsibility will provide additional incentives for owners or operators to comply with the regulations at all times, and will not entail a substantial administrative burden.

One commenter argued that sending the chief financial officer's annual letter to all UST sites will present significant administrative burdens on some firms. The Agency agrees, and notes that the commenter might have misread the proposed rule, which allows owners or operators to maintain all documentation at either the UST site or the owner's or operator's place of business. However, off-site records must be made available upon request of the implementing agency.

One commenter questioned the need to maintain an originally-signed duplicate of the standby trust agreement at each UST location or place of business when it is adequate to maintain only a copy of the guarantee, surety bond, or letter of credit. Similarly, the commenter questioned the need to maintain an originally-signed duplicate of the insurance policy when it is adequate to maintain a copy of the certificate of insurance, especially since the commenter's policy contains confidential information not intended for widespread distribution. Requiring originals, the commenter asserted, would increase the paperwork burden exponentially for firms with large numbers of facilities. As an alternative, the commenter recommended that the Agency allow owners or operators to keep copies at each location and be required to submit originals only in accordance with proposed §280.106 or within 15 days of a written request by the Agency.

The Agency agrees with the commenter that requiring an originally-signed duplicate of the standby trust agreement and the insurance policy to be maintained at each facility is unnecessary. An owner or operator need not maintain an originally-signed duplicate of an insurance policy in order to draw on the policy; similarly, an owner or operator need not present an originally-signed copy of a standby trust in order to exercise the trust.

Consequently, the Agency has revised the final rule to require an owner or operator using a guarantee, surety bond, or letter of credit to maintain a copy of the signed standby trust fund agreement and copies of any amendments to the agreement. In addition, an owner or operator using an insurance policy or RRG coverage is now required to maintain a copy of the signed insurance policy or RRG coverage policy, with the endorsement or certificate of insurance and any amendments to the agreements.

The Agency also received two comments suggesting that including a list of specific tanks and tank numbers in the financial assurance mechanism is unnecessary. The Agency agrees with these comments and has revised the required wording of all mechanisms to reference each facility where covered USTs are located rather than a tank-specific list of USTs at each facility (see discussion under Section III.E of this preamble).

Pursuant to the changes outlined in Section III.T, owners or operators will not be required to maintain evidence of financial responsibility for one year after closure. Rather, owners or operators need only maintain such evidence until the date of closure or until corrective action is completed if a release is found at the time of closure.

S. Drawing on Financial Assurance Mechanisms (§280.108)

The proposed rule provided special procedures for funding and drawing on the trust fund and on the standby trust fund for those financial assurance mechanisms (guarantees, indemnity contracts, surety bonds, and letters of credit) that require action by EPA to initiate payment. The rule proposed procedures for EPA to follow in funding corrective action and paying valid third-party claims, while minimizing the administrative burdens on the Agency and owners, operators, and claimants.

For corrective action claims, the proposed rule required that an owner or operator who notifies the Regional Administrator of a release in accordance with proposed notification requirements (Subpart F of 40 CFR Part 280) must provide evidence of financial assurance within 30 days. Once EPA possessed the evidence of the assurance mechanism, the Regional Administrator would be able to prepare and submit the appropriate instructions to the provider of financial assurance to fund the standby trust, if necessary. If the owner or operator fails to conduct any necessary corrective action, the Regional Administrator can direct the provider to fund the standby trust and can direct payments from the fund.

The proposal provided different procedures for third-party compensation claims in §280.108(b)(2) than were established for corrective action claims, because the UST owner or operator may contest a third-party compensation claim as invalid or inaccurate. In order to avoid EPA being placed in the role of a claims adjuster, the proposal required the owner or operator and the third-party claimant to submit a document signed by each party and by attorneys representing each party certifying the validity and amount of the claim. If the parties cannot agree on the claims or amount underlying the signed certificate, a lawsuit may be required to adjudicate the validity of the claim and any amount due.

In addition, §280.108(c) of the proposed rule established procedures for the Regional Administrator to draw on the financial assurance mechanisms once estimates or known costs of corrective action and third-party claims are available. The rule required the Regional Administrator to instruct the trustee to pay corrective action costs before paying third-party claims in order to minimize further threats to human health and the environment and additional third-party claims caused by the release.

A number of commenters criticized the Regional Administrator's discretionary authority to fund the standby trust fund as too vague, especially in light of the Regional Administrator's apparent lack of training in technical and financial issues, his vulnerability as a political appointee to political pressures, and the lack of a mechanism by which a guarantor or indemnitor can appeal the Administrator's decision to fund the amounts awarded. Some commenters thought that this loss of control over funds by financial institutions or other entities will discourage participation by such entities in providing financial assurance.

One commenter argued that providers of financial assurance will be reluctant to issue instruments if they believe they will have to process paperwork and follow the funding protocol even when their customers are financially capable of performing corrective action or paying third-party claims, or are able to obtain a substitute instrument. Apparently, providers of surety bonds and letters of credit carefully screen customers in order to minimize the likelihood that the instrument will ever be drawn upon; that is, these are truly intended to be "standby" instruments. As a solution, the commenter recommended that the 120-day cancellation provision be shortened, and that the instrument be drawn on only if substitute coverage has not been provided five working days before the instrument expires. This timeframe would lessen the probability that unnecessary paperwork and processing would commence and that cash would sit needlessly in trust funds requiring management by the trustee.

The essence of these comments is that the mechanism for funding the standby trust will diminish the availability of the financial assurance vehicles requiring establishment of a standby trust. In responding to these comments, as well as those discussed below, it should be noted that the Agency's desire to encourage the availability of a wide array of financial assurance vehicles under this rule is secondary to the Agency's mandate to assure that all financial vehicles will be readily available when a leaking UST is discovered. Thus, assuring the availability of funds for corrective actions must take precedence over marginally enhancing the availability of any one mechanism.

With respect to the commenters who thought that the Regional Administrator's role in ordering the funding of the standby trust or the disbursement of funds would impair availability or, worse, compromise the integrity of the financial assurance program, these comments greatly overstate the discretion accorded to the Director of the implementing agency (either the Regional Administrator or the state Agency director) under these regulations. The Director of the implementing agency is required to act only under clearly defined circumstances, and, other than for cancellations, only when the owner or operator does not cover the costs of corrective action and third-party liabilities. For example, the Director will require funding of and draw on the standby trust in three situations: (1) if the owner or operator fails to establish alternative financial assurance within 60 days of notice of cancellation, and the Director of the implementing agency determines or suspects that a release has occurred and so notifies the owner or operator (evidence of a suspected release under §280.50 includes positive monitoring results from testing, monitoring and sampling, unusual operating conditions, or the discovery of regulated substances in the environment); (2) if the Director determines that there is a release and the owner or operator fails to undertake necessary corrective action; or (3) if the Director receives proper certification of a third-party liability claim or a valid final court order for a third-party liability claim that the owner or operator fails to pay (§280.108(a)(2) in the final rule). Thus, while the Director is a critical participant, the provider of financial assurance and the owner or operator are intimately involved in the actions triggering funding of the trust, and ample notification accompanies each step.

One commenter seemed to argue that availability does not hinge on the Director's role so much as it is a function of the provider of assurance's aversion to risk and paperwork. According to this argument, these mechanisms will be available only to owners and operators who have the ability to undertake corrective action and meet demands for third-party damages, but will be jeopardized if it is likely that the standby trust might be funded, necessitating cost and paperwork.

In response, EPA notes that payment into the standby trust fund is not easily triggered, but occurs when cancellation of the financial assurance vehicle coincides with the likelihood or certainty of a release from an UST or when the owner or operator fails to carry out or pay for the actual costs of corrective action or fails to pay valid third-party claims. When an instrument is canceled and there is a known or suspected release, questions of aversion to handling costs or red tape are clearly secondary to securing the availability of funds for corrective action. The only other circumstances under which the standby trust would be drawn upon are consistent with the commenter's concern; that is when the owner or operator truly fails to cover the assured costs. Further discussion of cancellation and notice is provided in Section III.P, above.

One commenter objected to the specific language in the proposed §280.108(a)(l)(ii) that empowers the Regional Administrator to require funding of the standby trust if the financial assurance mechanism is canceled and not replaced and if the Regional Administrator "determines or suspects that a release ... has occurred," arguing that mere "suspicion" on the part of the Regional Administrator was not adequate ground for funding the trust. The commenter would amend this language to prevent the Regional Administrator from acting unless a determination has been made that a release has actually occurred.

The Agency cannot accept this restriction on the Director's authority to act on the suspicion that a release has occurred. EPA intends that this suspicion be based on objective evidence, such as failure of a tank tightness test, discovery of free product in adjacent sewer and utility lines, notice by the owner or operator, or other clear but unverified evidence. Further, the suspicion must be coupled with the cancellation and nonreplacement of the financial assurance mechanism as described above. In this case, there would be no new assurance mechanism to take over when the cancellation becomes effective, leaving the owner or operator potentially unable to fund corrective action and third-party liabilities arising from releases that occurred before the cancellation.

Finally, a number of commenters misunderstood the workings of the provision. One commenter thought that EPA should not propose procedures to evaluate third-party claims, but, rather, should allow the parties themselves or the courts to settle claims. An insurance company association commented that the language suggested that the owner or operator may settle a claim with a potential claimant without consultation with its insurer, thus placing the insurer in the position of indemnifying any claim, no matter how frivolous, if the owner or operator chooses to settle. An insurance company commenter requested that the standby trust provision be clarified to prevent its application to insurance entirely.

In response, the Agency notes that the claims for third-party damages are settled by the parties themselves, with full access to the courts if unresolved issues remain. The regulations simply provide a mechanism that expedites settlement of claims made against the funds held in trust if the parties agree on the details of the settlement. It is unlikely that insurance companies will be providing surety bonds, guarantees, or letters of credit, but if they do, issues concerning any alleged breach of duty by parties to the agreement are the province of the legal system, not the Director. Finally, the regulations state clearly that the provisions of the standby trust do not apply to insurance policies.

After reviewing all of the comments on drawing on the financial assurance mechanisms, EPA has concluded that only two changes should be made to §280.108 as proposed. All references to the Regional Administrator have been changed to the Director to clarify that these responsibilities are delegated to the Director of the state implementing agency in authorized states. In addition, the standby trust is only required for guarantees, letters of credit, and surety bonds because indemnity contracts are not included as an allowable mechanism in the final rule.

T. Release From the Requirements (§280.109)

Under the proposed rule, owners and operators were released from the requirements after completion of closure or, if corrective action was required, after the tank was properly closed and after completion of corrective action. The preamble to the rule, however, discussed the Agency's intention to require owners and operators to comply with the requirements for one year after closure. Many commenters objected to the possibility that owners or operators who properly close their tanks would be subject to the requirements for one year after closure. These commenters pointed out that there is no need to require coverage after closure because corrective action, when required, must be taken before closure, and because they believe that insurers are unlikely to insure owners and operators after tanks are closed.

Commenters indicated that it is unlikely that financial assurance providers will provide coverage after tank closure. The Agency recognizes that this is the case. The closure requirements in Subpart G of the technical standards specify a closure process that requires owners and operators to notify the Director of the implementing agency before closure, and conduct a site assessment. If releases are identified, the owner or operator must conduct corrective action and the tanks cannot be closed until corrective action is completed. This process will ensure that closure is not completed until any releases from the petroleum UST system have been cleaned up.

Therefore, the Agency has determined that the need for financial assurance will be greatly diminished after corrective action and closure are completed and will not require owners and operators to maintain financial assurance after proper closure of their tanks. Under the final rule, owners and operators are released from the requirements after completion of closure or of corrective action and closure, when required.

U. Bankruptcy or Other Incapacity of Owner or Operator or Provider of Financial Assurance (§208.110)

The proposed rule required that any owner or operator named as a debtor in voluntary or involuntary bankruptcy proceedings (under Title 11 of the U.S. Code) notify the Regional Administrator within 10 days after commencement of such proceeding. In addition, the proposed rule required a guarantor or indemnitor to notify the owner or operator by certified mail within 10 days after commencement of a voluntary or involuntary proceeding under Title 11 (Bankruptcy) of the U.S. Code that names such guarantor or indemnitor as debtor. The proposed rule stipulated, furthermore, that any owner who demonstrated financial responsibility using a mechanism other than the financial test of self-insurance will be deemed to be without the required financial assurance in the event of a bankruptcy or incapacity of its provider of financial assurance, or a suspension or revocation of the authority of a provider to issue a guarantee, indemnity contract, surety bond, insurance policy, risk retention group coverage policy, letter of credit, or state-required mechanism. Finally, proposed §280.110 required states to notify the Regional Administrator and owners and operators covered by a state fund or other state assurance within 30 days after the assurance mechanism becomes incapable of covering assured costs. The proposed rule adopted the provision in Subtitle C rules for the incapacity of owners or operators, guarantors, or financial institutions (see §§264.148 and 265.148), but amended the language to make it more applicable to the requirements for Subtitle I financial responsibility.

One commenter doubted whether an owner or operator would be informed within 10 days after the commencement of bankruptcy of a provider of assurance to notify EPA of the bankruptcy. The commenter suggested that this requirement be eliminated.

The commenter appears to have misread the rule. Proposed §280.110 required a guarantor or indemnitor to notify the owner or operator by certified mail within 10 days after commencement of a voluntary or involuntary bankruptcy proceeding naming the guarantor or indemnitor as a debtor. (As noted in Section III.G of today's preamble, indemnity contracts cannot be used to satisfy the financial responsibility requirements.) An owner or operator, in accordance with §280.106, must notify the Director of the implementing agency of the incapacity (e.g., bankruptcy) of a provider of financial assurance only if the owner or operator fails to obtain alternate assurance within 30 days of receiving notice of such incapacity.

The Agency, therefore, has decided to promulgate these provisions as proposed.

V. Provisions Pertaining to Other Instruments (§280.111)

1. Maintaining Other Instruments at Required Levels of Coverage

If the Director of the implementing agency requires funding of the standby trust where financial assurance is provided by a guarantee, letter of credit, or a surety bond, and draws on the standby trust or on a trust fund to pay the cost of corrective action or third-party damages, the full amount of assurance required by §280.93 will no longer be available. The proposed regulations did not specify the steps the owner or operator had to take to assure that his financial responsibility obligations were being met after one of these mechanisms had been used. While the need to take these steps was implicit in the proposed rule, the Agency is making a technical addition to the rule to clarify precisely how the mechanisms would be implemented. Accordingly, a new section has been added to the final financial responsibility regulation (§280.111) establishing requirements for replenishing a guarantee, letter of credit, surety bond, or trust fund if the assurance these mechanisms provide falls below the required amount.

These new provisions provide that, if the amount in the standby trust is reduced below the full amount of assurance required, the owner or operator shall:

(1) by the anniversary date of the financial mechanism from which the funds were drawn,

(2) replenish the value of financial assurance to equal the full amount of assurance required, or

(3) acquire another financial assurance mechanism for the amount by which funds in the standby trust have been reduced.

If a combination of mechanisms was used to provide the assurance funds which were drawn upon, replenishment shall occur by the earliest anniversary date among the mechanisms. This new section provides needed instruction for the Director of the implementing agency and the owner or operator, and, more importantly, ensures that an adequate level of funding will be available for corrective action and payment of third-party damage claims.

2. Exclusionary Language for Other Instruments

The language of the instruments for guarantees, letters of credit, surety bonds and trust funds in today's rule contains a provision that they do not apply to certain categories of damages or obligations. These exclusions are patterned on existing standard exclusions found in insurance coverage, and are intended to ensure that the coverage is not exhausted by the payment of claims that are covered by other compensation systems or that are otherwise not intended to be included within the scope of coverage. The five exclusions do not represent all common insurance policy exclusions, but were selected because they were considered most relevant to the financial assurance mechanisms for liability required under Subtitle I. In commenting on specific mechanisms, some commenters were concerned about the possible uses for the mechanism or the Director's perceived discretion in ordering payments from the standby trust. Incorporating this exclusionary language will ensure more certainty for the owner or operator and for the provider that these mechanisms will be used only for costs associated with UST releases, as the rule requires.

The exclusions, with one exception, parallel exclusions that are being proposed for instruments under Subtitle C. The purpose of adding these exclusions to Subtitle C instruments is similar to the purpose under Subtitle I, to ensure that coverage provided by the instruments will be available only to respond to corrective action and third-party claims related to releases from underground storage tanks and will not be available to cover routine accidents not related to UST releases or claims for damage to the owner or operator, or to meet other liabilities assumed by the owner or operator which are unrelated to UST releases. The Subtitle C exclusion, however, excludes damage to the property of the owner or operator. While permissible for Subtitle C liability requirements because only third-party damages must be covered, such an exclusion would be inappropriate for Subtitle I because coverage for corrective action is explicitly required. Accordingly, EPA is providing a limited form of on-site exclusion which prevents use of funds to cover non-required corrective action (e.g., cleanup which would be part of routine maintenance and not subject to Subpart F of the technical standards).

Exclusion (a), for obligations under workers' compensation, disability benefits, or unemployment compensation law or similar law, is intended to prevent the use of Subtitle I financial assurance mechanisms to cover such claims.

Exclusion (b), for bodily injury to the employees of the owner or operator, is also intended to ensure that such claims are not covered by assurance mechanisms obtained to comply with this rule.

Exclusion (c), for bodily injury or property damage arising out of the ownership or use of any aircraft, motor vehicle, or watercraft, is to prevent use of an authorized financial assurance mechanism for routine accidents that are not directly related to management of underground storage tanks.

Exclusion (d), for property damage other than that related to cleanup as required by under Subpart F of the technical standards, is intended to prevent use of the instruments' funds to meet other on-site cleanup costs such as those for routine maintenance.

Exclusion (e), for bodily injury or property damage for which the owner or operator is obligated to pay damages by reason of the assumption of liability in a contract or agreement, is intended to exclude liabilities assumed by contract that do not involve the ownership or operation of the underground storage tank. It does not exclude settlements or other agreements to pay damages in connection with accidental occurrences resulting in bodily injury or property damage caused by releases from underground storage tanks.

W. Suspension of Enforcement (§280.112)

1. Statutory Authority

RCRA Section 9003(d)(5)(D) authorizes the Administrator to suspend enforcement of the financial responsibility requirements for particular classes or categories of USTs. Suspensions of enforcement may allow time for owners and operators of USTs in particular classes or categories or located in particular states to obtain assurance for corrective action and third-party compensation costs. Because some owners or operators of certain classes or categories of USTs may find that financial assurance mechanisms are not generally available on the date set for compliance in the rule, suspensions would allow these owners and operators time to comply with the requirements through the formation of RRGs or the establishment of state funds.

The statute requires that, to suspend enforcement, the Administrator must determine that (1) methods of financial responsibility are not generally available for USTs in the class or category; and (2) either steps are being taken to establish a RRG for that class of tanks or a state is taking steps to establish a corrective action and compensation fund under RCRA Section 9004(c)(1). A suspension of enforcement may not exceed 180 days. The Administrator has the discretion to suspend enforcement for a period of less than 180 days.

After an initial suspension expires, the Administrator may again suspend enforcement of financial responsibility requirements, but only if (1) methods of financial responsibility are still not generally available, and (2) either (a) "substantial progress" has been made in establishing a RRG; or (b) the owners or operators of USTs belonging to the class or category demonstrate, and the Administrator finds, that the state is unable or unwilling to establish a fund and formation of a RRG is not possible.

EPA proposed relatively detailed procedures and criteria for its consideration of suspension applications. EPA requested comment on all aspects of the proposed suspension of enforcement procedures and on any alternative procedures.

2. Suspension of Enforcement Process

A number of commenters stated that the proposed requirements were unnecessarily complex and burdensome. They urged the Agency to simplify the procedural requirements associated with suspension of enforcement. (A detailed summary of these comments is contained in the Response to Comments document, Section II.T., in the docket.) Based on these comments and the enormous uncertainty over the number of suspension applications the Agency will receive on the dates set for compliance, the Agency has decided to defer promulgation of the final procedures for suspension of enforcement. Therefore, this section is not included in today's final rule; EPA intends to promulgate final suspension procedures as necessary in the future.

As noted earlier, the regulated community subject to these rules is extremely large. Due to current constraints in the insurance industry and the assurance risks associated with the existing tank universe, there is also a correspondingly large universe of USTs for which financial assurance is currently unavailable. However, EPA is today phasing in these requirements over two years and recognizes that the availability of certain financial assurance mechanisms (particularly state funds) may change dramatically during that time. Moreover, some states may receive approval to operate their programs in lieu of the federal UST program as the compliance dates arrive. As a result of these factors, there is significant uncertainty over whether, and to what extent, suspension of enforcement will be necessary in the future. Thus, it is impossible for the Agency to craft appropriate procedures for implementing the provision in a manner that is at the same time consistent with statutory requirements, responsive to the regulated community, and not an overwhelming burden on the Agency.

During the phase-in period, the Agency will gain experience with implementation of the UST financial responsibility program and gather additional information on the form that suspension of enforcement petitions should take. This will serve as the basis for adopting procedures, if necessary, before the scheduled compliance dates for the largest group of UST owners and operators. Until such procedures are promulgated, however, the Agency does not intend to exercise its discretionary suspension authority.

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[ Ahead to: Section IV. Integration With Other EPA Programs ]


FOOTNOTES

FOOTNOTE #5 Information supporting EPA's assumptions with regard to the types of financial assurance mechanisms available to petroleum marketing firms owning different numbers of USTs can be found in the Regulatory Impact Analysis for the rule that is available in the docket. Return to Text


FOOTNOTE #6 U.S. Department of Commerce, Liability Risk Retention Act of 1986 Implementation Report, September 1987. Return to Text


FOOTNOTE #7 The Rising Costs of General Liability Legal Defense. Insurance Services Office, 1986. Return to Text

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