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May 25, 2017 Articles

EPA Proposes Financial Assurance Rule for Hard-Rock Mining

The proposed rule provides that the amount of financial assurance must be sufficient to pay for estimated environmental remediation actions as well as natural resources damages.

By Irvin M. Freilich and David J. Miller – May 25, 2017

Following decades of inaction and a court order establishing a deadline by which the U.S. Environmental Protection Agency (EPA) was ordered to issue a proposed rule, EPA announced on December 1, 2016, that it would publish a rule creating financial assurance requirements for parties conducting remediation projects in the hard-rock mining industry. The proposed rule was published in the Federal Register on January 11, 2017. 

Inaction and Court Orders
Section 108(b) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA) directed EPA to develop rules requiring “that classes of facilities establish and maintain evidence of financial responsibility consistent with the degree and duration of risk associated with the production, transportation, treatment, storage, or disposal of hazardous wastes.” 42 U.S.C. 9608(b)(1) (1980). Although these rules were required to be promulgated by 1985, EPA failed to publish any financial responsibility rules whatsoever, which led to litigation and the court-imposed deadline.

In 2008, several environmental organizations brought suit against EPA in the U.S. District Court for the Northern District of California seeking to force EPA to engage in rulemaking pursuant to section 108(b). See Sierra Club v. Johnson, No. C08-01409WHA, 2009 WL 482248, *1 (N.D. Cal. Feb. 25, 2009). After EPA failed to comply with an order requiring that it publish proposed financial assurance rules in 2009, six environmental organizations brought an action in the U.S. Court of Appeals for the District of Columbia in 2014 seeking to compel EPA to finalize the financial assurance rules. See In re Idaho Conservation League, 811 F.3d 502 (D.C. Cir. 2016). The court approved a consent order pursuant to which EPA was required to propose financial assurance rules for the hard-rock mining industry by December 1, 2016, and publish notice of final action by December 1, 2017.

EPA issued a prepublication of the proposed rule for the hard-rock mining industry on December 1, 2016, and the proposal was published in the Federal Register on January 11, 2017. Financial Responsibility Requirements Under CERCLA § 108(b) for Classes of Facilities in the Hardrock Mining Industry, 82 Fed. Reg. 3388, 3431 (proposed Jan. 11, 2017) (to be codified at 20 C.F.R. pt. 320). Importantly, the newly proposed financial assurance rule is limited to the hard-rock mining industry, and EPA estimates that about 221 facilities throughout the country will be subject to the rule.

Basics of the Proposed Rule
The proposed rule includes a detailed explanation of financial assurance mechanisms that will be permitted under the rule and provides that the amount of financial assurance must be sufficient to pay for estimated environmental remediation actions as well as natural resources damages. The proposal allows a responsible party to demonstrate that it has the financial wherewithal to cover the cost of remediation through the use of approved financial assurance mechanisms, which would include trust funds, insurance policies, letters of credit, surety bonds, or a combination of those instruments.

In addition, EPA has included in the proposed rule the potential use of self-insurance or a corporate guarantee to satisfy a facility’s financial assurance obligation. Under the proposed rule, self-guarantees would be subject to a “financial test” to determine the likelihood of a responsible party’s future solvency. The draft rule specifically states that it is EPA’s preference that parties not be allowed to use a financial test or a corporate guarantee; however, EPA has included these mechanisms as an option “to fully evaluate this issue, and to gather as much information as possible to inform its ultimate decision on whether the financial test and corporate guarantee mechanisms are appropriate for use by hardrock mining facilities under CERCLA. . . .” 82 Fed. Reg. 3388, 3431. Those parties unable to satisfy the financial test would be required to establish a trust fund or acquire one (or more) of the aforementioned instruments.

The proposed financial test would be based on a responsible party’s credit rating. The party seeking to satisfy the financial test would be required to submit an annual verification that it holds a minimum rating established by an approved credit-rating agency. In addition, a party seeking to meet the financial test would also be required to have a net worth of at least six times the amount of its environmental obligations as well as U.S. assets of at least 90 percent of its total assets or six times the amount of its environmental obligations. Furthermore, EPA notes that the CERCLA financial assurance requirement applies in addition to other federal and state requirements that might exist.

A provision of the proposed rule that is likely to generate controversy would allow individuals to bring a direct action against an insurer or holder of a financial assurance instrument established under the section 108(b) regulations. Pursuant to CERCLA section 108(c)(2), a direct action may be brought against the guarantor or issuer of a financial assurance instrument, instead of the responsible party itself, in instances where the party liable under CERCLA is (1) bankrupt or (2) unavailable after “reasonable diligence” such that jurisdiction in the federal courts cannot be obtained over that party. 42 U.S.C. 9608(c)(2). With this provision in mind, EPA selected the financial assurance mechanisms that would be permissible under the proposed rule. According to the rule proposal, “the ability to take direct action against the financial responsibility instrument may be critical for assuming that funds will be made available for necessary cleanup.” 82 Fed. Reg. 3388, 3413–14. However, the insurance companies and financial institutions that will be providing the financial assurance mechanisms are unlikely to willingly expose themselves to the risks and costs of litigation. Accordingly, only a small number of providers may be willing to offer insurance policies, bonds, letters of credit, and other approved instruments for the purposes of satisfying the section 108(b) requirement, and those that do so are likely to pass the risk along to responsible parties in the form of increased costs associated with the various financial assurance mechanisms.

Financial Assurance Rules in Other Industries
In addition to the hard-rock mining rule proposal, EPA announced that it would be developing financial assurance rules for the chemical, petroleum, and electric power industries. On January 11, 2017, EPA published a notice of intent to proceed with rulemaking in the Federal Register confirming that the agency would begin the process of establishing financial assurance requirements for facilities in these industries. Financial Responsibility Requirements for Facilities in the Chemical, Petroleum, and Electric Power Industries, 82 Fed. Reg. 3513 (published Jan. 11, 2017). The notice of intent details the relevant background of financial assurance regulations under section 108(b), including the litigation and resulting order. According to EPA, it has not received evidence suggesting that financial assurance regulations for these industries are not necessary, so it will proceed with the rulemaking as previously anticipated. The proposed hard-rock mining industry rule likely provides considerable insight into the requirements that will be included in the rules currently being developed for these other industries.

Although over 30 years in the making, a proposed financial assurance rule is finally in print. The current proposal expresses a preference for mechanisms such as trust funds, which provide dedicated funds for remedial projects. The use of self-guarantees is likely to be a very controversial provision of the proposed rule that will likely generate numerous comments from both the regulated community and environmental groups. Regardless, though, the final rule promulgated by EPA may very well serve as a template for yet-to-be-developed rules for other industries.


Irvin M. Freilich is a director and David J. Miller is an associate with Gibbons P.C. in the firm’s Newark, New Jersey, office.

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