If you own a solid waste landfill, a non-hazardous landfill, a hazardous waste treatment, storage and disposal facility, or other recycling or reuse sites, you already know that you must prove that the money exists to close that facility and maintain it - otherwise known as closure/postclosure (C/PC) care. You also may know that this money can be used if the facility is abandoned, loses its permits or the owner becomes bankrupt.
What you may not know, however, are the alternative financial assurance methods for long-term care.
Traditional ways to meet this financial assurance requirement include letters of credit, trust funds, surety bonds, performance bonds and a financial test/corporate guarantee.
For example, a facility may deposit interest-generating funds annually into a trust that would be equal to the C/PC cost estimate, minus prior payments and divided by the facility's estimated years of life. Returns on these trusts typically are limited investment options and may be restricted to assure liquidity.
Although a trust fund allows planning for anticipated closure costs, many states require accelerated payments or funding the entire amount prior to start-up or permit renewal.
C/PC bonds also are prevalent, but typically are secured by high levels of collateral and annual fees of up to 10 percent. Depending on the facility's financial situation, bonds, letters of credit and trusts restrict a company's cash or credit. Many facilities cannot meet the parameters financial test/corporate guarantee mechanisms require.
For example, cash and credit lines are critical to start-up facilities that may be highly leveraged, whereas operating facilities may be squeezed because facility upgrades and/or expansions cause service fees to be lowered. Consequently, maintaining letters of credit and trust funds for the life of a facility can be financially difficult.
What's an alternative? Approved insurance programs, which typically include policy forms and endorsements that have been designed to meet the federal C/PC regulations and to provide regulatory certifications. Copies of approved C/PC plans, financial documents and Pollution Legal Liability (PLL) insurance coverage documents often are required to obtain C/PC insurance coverage.
Insurance for C/PC may be provided by the insurance company endorsing an existing PLL policy or by issuing a separate policy. Keep in mind however, that insurance, like other C/PC approaches, pays for facility closure and long-term care should a premature, unexpected closure occur. Therefore, a facility currently undergoing closure is unlikely to obtain insurance but should seek finite risk and fronting arrangements instead.
Finite risk programs combine a fund, paid into by the facility, with an overlying layer of true risk transfer to produce a seamless insurance product. The funded component addresses active or impending C/PC obligations. Risk transfer insurance can be structured in excess of the fund to address premature fund depletion and to cover the full C/PC obligation amount prior to fund completion.
How does a finite risk C/PC program work? Consider a new non-hazardous waste landfill that is required to post its entire C/PC financial assurance obligation - $5 million - prior to permitting, despite the fact that it has an estimated life of eight to 10 years.
The facility chooses a trust because it wants to reserve C/PC costs directly from tipping fees. However, cash for the full C/PC amount is not available at start-up. So a finite risk program allows for annual payments toward the $5 million total over five years, with the unfunded portion of the obligation provided annually by excess insurance.
Each year, the facility can certify a C/PC amount equal to the total obligation while making partial payments to the fund. Interest accrued on the fund is used to pay the premium for fund maintenance and the program's risk transfer component.
While most state environmental agencies have adopted C/PC financial assurance regulations that are similar to or the same as federal regulations, rules regarding C/PC mechanisms can vary from state to state. Currently, at least 31 states have allowed or are reviewing the use of insurance policies to meet C/PC financial assurance requirements.
Recent economic pressures have forced many owners/operators to explore alternatives to improve cash flows and reduce secured credit.
When choosing this alternative over traditional C/PC financial assurance methods, look for an insurance carrier that works closely with state regulatory agencies to ensure that C/PC programs and insurance meet all regulatory terms and conditions. And because each facility's financial situation is different, weigh the alternatives and select an insurer that will customize its programs.