BILL ANALYSIS �
AB 480
SENATE COMMITTEE ON ENVIRONMENTAL QUALITY
Senator S. Joseph Simitian, Chairman
2011-2012 Regular Session
BILL NO: AB 480
AUTHOR: Solorio
AMENDED: June 23, 2011
FISCAL: No HEARING DATE: July 6. 2011
URGENCY: No CONSULTANT: Caroll
Mortensen
SUBJECT : CAPTIVE INSURANCE: SOLID WASTE LANDFILLS
SUMMARY :
Existing law :
1)Requires any person owning or operating a solid waste
landfill, to submit to the Department of Resources Recycling
and Recovery (DRRR) evidence of financial ability to provide
for the cost of closure and postclosure maintenance, in an
amount that is equal to the estimated cost of closure and 15
years of postclosure maintenance, contained in the closure
plan and the postclosure maintenance plan submitted.
(Public Resources Code �43600).
2)Required the Integrated Waste Management Board (IWMB) to, by
January 1, 2008:
a) Study and define the conditions that potentially
affect solid waste landfills, including technologies and
engineering controls designed to mitigate potential
risks, in order to identify potential long-term threats
to public health and safety and the environment.
b) Study various financial assurance mechanisms that
would protect the state from long-term postclosure and
corrective action costs in the event that a landfill
owner or operator fails to meet its legal obligations to
fund postclosure maintenance or corrective action during
the postclosure period. (�43050).
c) Required the IWMB by July 1, 2009, to adopt
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regulations and develop recommendations for needed
legislation to implement the findings of the study in #2
above. (�43050). �Note: Regulations were finalized on
April 1, 2010, and took effect on July 1, 2010].
3)Requires evidence of financial ability be sufficient to meet
the closure and postclosure maintenance costs when needed.
4)Requires the owner or operator of a solid waste landfill to
provide evidence of financial ability through the use of any
of the mechanisms set forth in Part 258 (commencing with
Section 258.1) of Title 40 of the Code of Federal
Regulations or through the use of any other mechanisms
approved by DRRR.
5)Authorizes DRRR to adopt regulations that reasonably
condition the use of one or more of those mechanisms to
ensure adequate protection of public health and safety and
the environment, but must not exclude the use of any
mechanism permitted under federal law.
6)States that if the evidence of financial ability for
closure, postclosure, or corrective action is demonstrated
by use of insurance, DRRR may approve the insurance
mechanism if the issuer of the insurance policy is either:
a) Licensed by the Department of Insurance to transact
the business of insurance in the State of California as
an admitted carrier or eligible to provide insurance as
an excess and surplus lines insurer in California through
a surplus lines broker currently licensed under the
regulations of the Department of Insurance and upon the
terms and conditions prescribed by the Department of
Insurance; or
b) The insurance carrier is established by a solid waste
facility operator to meet the financial assurance
obligations of that operator; insurance may be approved
by the board that meets all of the following
requirements:
i) The insurance mechanism is in full compliance with
the requirements for insurance that are specified in
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subdivision (d) of Section 258.74 of Title 40 of the
Code of Federal Regulations.
ii) The insurance carrier is an insurer domiciled in
the United States and licensed in its state of domicile
to write that insurance.
iii) The insurance carrier only provides financial
assurance to the operator that has established the
insurance carrier as a form of self-insurance and does
not engage in the business of marketing, brokering, or
providing insurance coverage to other parties.
iv) The insurance carrier shall maintain a rating of
A- or better by A.M. Best, or other equivalent rating
by any other agency acceptable to DRRR.
7)Establishes, on and after July 1, 2012, the State Solid
Waste Postclosure and Corrective Action Trust Fund, and
related program requirements if, on or before January 1,
2012, letters of participation are received from landfill
operators representing at least 50% of the total volume of
waste disposed of in 2010 that indicate they wish to be part
of the program, and additionally:
a) Requires, if the mandated participation level trigger
of 50% is reached, then, on or after July 1, 2012, an
additional $0.12 per ton fee will be assessed for the
participating operators.
b) Creates a system of requirements for owners and
operators of existing landfills and new landfills to 'opt
in' to payment of the fee and states that once they elect
to pay in to the Fund, they may not 'opt out.'
c) Specifies eligible uses for the Fund and establishes
related program requirements.
8)Defines "captive insurer" as an insurance company owned by
another organization with the exclusive purpose to insure
risks of the parent organization and affiliated companies.
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9)Requires, generally, that insurers be licensed in this state
before issuing policies to cover California risks, but
allows non-admitted insurers to issue policies where the
licensed insurers are not providing that type of insurance.
10)Requires, generally, that nonadmitted insurers be on a list
of eligible surplus lines insurers before issuing policies
covering California risks.
11)Requires, by regulation, that only admitted and eligible
nonadmitted insurers may provide coverage to satisfy the
closure and post-closure financial responsibility
requirements for landfill operators.
This bill :
1) Clarifies that an issuer of an insurance policy that meets
all of the requirements of Public Resources Code
�43601(e)(2) (See #6b under Existing Law above) must be
eligible to provide the insurance described in that
subdivision.
2) Specifies that an issuer of an insurance policy shall not
be required to be a California admitted insurer or be
required to provide the insurance through a surplus line
broker.
COMMENTS :
1)Purpose of Bill . According to the author, existing DRRR
regulations are inconsistent with state statutes and
effectively prohibit a solid waste company from using
captive insurance -- even when the insurer meets all the
prescribed statutory criteria set forth in Public Resources
Code �43601. The solid waste industry has invested and
continues to invest in a variety of recycling and diversion
programs. Many of these companies also operate landfills as
part of an integrated system to manage waste materials. The
capital costs associated with DRRR's newly enacted post
closure financial assurance regulation requirements reduces
the amount of available capital to invest in these programs.
By ensuring that lower cost capital authorized by law is not
impeded by unnecessarily restrictive regulations, companies
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that operate landfills will be in a better position to
increase investments in recycling and comply with state
recycling requirements.
2)Background .
a) Closure/Postclosure . DRRR is mandated to protect
public health and the environment from pollution due to
the disposal of solid waste, including the oversight of
facilities that have ceased to take waste. This includes
the long-term oversight of those closed facilities.
Closure is the process during which a landfill is no
longer receiving waste and is being prepared for
postclosure maintenance according to an approved plan and
construction schedule. Closure and postclosure
maintenance plans ensure that landfill closure and
postclosure maintenance and the eventual reuse of
disposal sites will conform to state performance
standards and minimum substantive requirements.
Approved closure and postclosure maintenance plans are a
prerequisite of a facility's operating permit. The owner
and operator are responsible for developing and
implementing the plans. The owner and operator must also
provide demonstrations of financial responsibility for
both closure and postclosure maintenance. Closure and
postclosure plans are required for all solid waste
disposal sites operating after January 1, 1988. They are
subject to the review and approval of DRRR as well as the
local enforcement agency and the regional water quality
control board (RWQCB).
Owners or operators of solid waste landfills are required
to provide evidence of financial ability to pay for the
costs of closure and postclosure maintenance. Current
law allows owners or operators of facilities to utilize
any of the available financial mechanisms set forth in
federal requirements and regulations. Current law allows
DRRR to adopt regulations that reasonably condition the
use of those mechanisms.
b) Cost of Closure . According to DRRR, in documents
related to the establishment of the State Solid Waste
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Postclosure and Corrective Action Trust Fund (See #5a
under Related Legislation below), it is estimated that
the total financial exposure posed by environmental
threats from landfills is calculated to be as much as
$6.2 billion when projected over the next 100 years.
Current statutory and regulatory requirements for
closure, postclosure maintenance, corrective action, and
financial assurances reduce this total exposure to
approximately $3.2 billion by requiring approximately $3
billion in financial assurances from landfill operators.
There is a reasonable expectation that landfill operators
will cover $2.8 billion of the $3.2 billion exposure on
their own, without providing assurances to the state,
leaving a projected $370 million in residual financial
exposure that cannot be addressed through regulation.
The Trust Fund was created to attempt to cover this gap.
c) Financial Assurance . DRRR is mandated by existing law
and the regulations to require financial assurance
demonstrations of landfill operators for closure and
postclosure maintenance of the facility, operating
liability coverage, and reasonably foreseeable or known
corrective action coverage. The closure cost
demonstration is intended to ensure the operator is
financially capable of adequately closing the landfill,
typically at the end of the landfill's useful life.
Postclosure maintenance cost demonstrations assure that
funds will be readily available to maintain the closed
facility for a minimum of 30 years. Operating liability
demonstrations are required of all landfill operators to
provide compensation for individuals that may be
impacted, including exposures to pollution, by the
operations of the landfill. The reasonably foreseeable
or known corrective action coverage is intended to
provide assurance of the operator's ability to mitigate
any releases to the environment (e.g. groundwater
contamination) from the facility.
d) Types of Financial Assurance Demonstrations . All the
financial assurance demonstrations accepted by DRRR
provide the security of either a third-party maintaining
the financial integrity of the demonstration, or the use
of a stringent, audited, financial analysis of the
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operator (or provider), both of which reduce to an
acceptable level the risk to DRRR in the event of a
default. In brief, the trust funds and letters of credit
are provided by banks which are reviewed by state or
federal examiners for financial soundness; insurance
policies and surety bonds are provided by insurers
meeting either California insurance requirements or
California surety requirements and qualifying for federal
listing for government projects; enterprise funds and
pledges of revenue are provided by local government
entities with mandates to protect the public health and
the environment and which are controlled by officials
politically independent from the landfill operations
within the local government, and; the financial means
test and corporate guarantee available to private
operators are highly stringent, nationally accepted
financial demonstrations of the operator, or its parent
corporation. All the accepted demonstrations provide the
protection associated with either the unlikely
simultaneous financial failure of at least two
independent entities, or a sensitive "trigger" of the
operator's financial downturn (while still financially
capable of providing an alternative financial
demonstration).
DRRR regulations allow for a number of alternative
financial assurance demonstrations for landfill
operators. These include: trust funds, enterprise funds,
letters of credit, surety bonds, pledges of revenue,
financial means tests and corporate guarantees, and
closure and postclosure maintenance insurance as well as
operating liability insurance.
e) Captive Insurance . "Captive insurers," more generally,
a captive insurance company is a form of Alternative Risk
Transfer (ART). ART mechanisms have grown as a key tool
in the typical risk manager's tool kit as an alternative
to traditional insurance. Under an ART program, a
company's risks are funded by means other than the
purchase of insurance through an agent broker from an
admitted insurer. Forms of ART that are commonly
encountered vary widely - they include surplus lines
placement, self-insured trusts, risk retention groups and
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captive insurance companies. The ART market permits
businesses to control costs associated with insurance
brokerage while allowing the business a means to finance
all or a portion of its risk.
Captive insurance companies are a distinct and recognized
form of ART, and as indicated above, they have been
recognized as a class of risk management under
California's Insurance Code since 1992. As described in
Insurance Code �1216.1 "captive insurers are either
insurance companies which are owned by another
organization and whose exclusive purpose is to insure
risks of the parent organization and affiliated
companies, or in the case of groups and associations,
insurance organizations which are owned by the insureds
and whose exclusive purpose is to insure risks of member
organizations and group or association members and their
affiliates."
Captive insurance is a regulated form of ART
self-insurance that has existed since the 1960's. They
are a closely held insurance company whose insurance
business is primarily supplied by and controlled by
owners, and in which the original insureds are the
principal beneficiaries. The insureds have direct
involvement and influence over the company's major
operations, including underwriting, claims and management
policy and investments. There are currently 5,000
captives licensed worldwide that service their parents'
risk financing needs. U.S.-owned captives account for
about 2/3rds of the 5,000 captives worldwide. While
captives can be domiciled and licensed in a wide number
of domiciles both in the U.S. and off-shore, almost half
of U.S. states and more than 3 dozen countries have
established legal frameworks to attract captive insurance
entities to domicile there.
Vermont, which began serving as a domiciliary state for
captive insurers upon its Legislature's 1981 adoption of
Vermont's Special Insurer Act, is now recognized as the
largest captive insurance domicile in the U.S. and the
third largest in the world, with an excess of $25 billion
in gross written premium in 2010. Vermont is also home to
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42 of the companies that make up the Fortune 100, and 18
of the companies that make up the Dow 30 have Vermont
captives.
3)AB 715 (Figueroa) and Subsequent Regulatory Amendments . The
passage of AB 715 (Figueroa) Chapter 978, Statutes of 1998,
specified that DRRR may review and approve captive insurance
companies of solid waste facility operators as a financial
assurance demonstration. Amendments made to DRRR
regulations after the enactment of AB 715 clarified that
only captive insurers that either maintain a CDI license as
admitted insurers, or that are eligible to provide coverage
as a surplus lines insurer in California, will be eligible
to provide financial assurance demonstrations to DRRR.
4)Regulations . As mentioned in #3 above and under #5c below
under "Related Legislation," statutes mandated the
development of regulations addressing closure/postclosure
issues, including financial assurances. All those
regulations were developed with public workshops and
stakeholder input. In October 2010, Waste Management, Inc.
petitioned DRRR, in accordance with Government Code �11340.6
that allows interested parties to petition a state agency to
request adoption, amendment, or repeal of a regulation. The
petition requested that DRRR amend Section 2248 of Title 27
of the California Code of Regulations to permit as a
closure/post-closure/corrective action financial assurance
mechanism, an insurance policy issued by a captive insurance
company that meets the requirements of Public Resources
Code �43601(e)(2) �See #6b of Existing Law].
The petition was "partially" denied in that DRRR, in
November 2010, replied to Waste Management, Inc. and stated
that it would not immediately open the regulation to make
the requested amendment. However, DRRR did state that they
would commence a review of the request and add it to their
2011 Rulemaking Calendar for possible action.
5)Related Legislation .
a) AB 274 (Portantino) Chapter 318, Statutes of 2009,
establishes the State Solid Waste Postclosure and
Corrective Action Trust Fund (Trust Fund). AB 274
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authorizes solid waste disposal facility operators to
elect to participate in the Trust Fund by paying a
quarterly fee of $0.12 per ton of waste disposed. The fee
will be used to cover the cost of postclosure activities
and corrective actions in those situations where owners
or operators of solid waste disposal facilities fail to
perform necessary actions and all financial assurances
have been exhausted. The fee does not become operative
unless the DRRR receives, on or before July 1, 2011,
letters of participation from landfill operators
representing at least 50 percent of the total annual
waste disposal tonnage in 2010.
b) AB 1004 (Portantino) Chapter 417, Statutes of 2010,
extended the deadline for the election for landfill
operators to participate in the Trust Fund from January
1, 2012.
c) AB 2296 ( Montanez) Chapter 504, Statutes of 2006,
required the IWMB to:
i) Conduct a study to define the conditions that
potentially affect solid waste landfills, including
technologies and engineering controls designed to
mitigate potential risks, to identify potential
long-term threats to public health and safety and the
environment.
ii) Conduct a study on various financial assurance
mechanisms that would protect the state from long-term
postclosure maintenance and corrective action costs in
the event that a landfill owner or operator fails to
meet its legal obligations.
iii) To adopt regulations to address the findings of
the study and provide recommendations for necessary
statutory changes to implement the finding of the study
(Regulations became effective July 2010).
6)Opposition Concerns . In general, opponents contend that AB
480 sidesteps the regulatory process. They state that DRRR
has repeatedly reviewed the use of captive insurance and
found it lacking. They express concern that with the
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allowance of captive insurance, it will increase the state's
unfunded liability for financial assurance and increase
costs on other landfill operators. There is also concern
that without strong financial assurance mechanisms, the
burden would fall upon local governments and taxpayers to
pay for the cleanup.
7)Policy Considerations . If the Committee were to pass AB
480, it would be prudent to set a cap on the amount of
captive insurance to cover financial assurances for solid
waste landfills. Also, to evaluate how captive insurance
works as a mechanism for California, and to allow for
Legislative review, the provisions of AB 480 should sunset
in five years.
SOURCE : Assemblymember Solorio
SUPPORT : Waste Management, Inc.
OPPOSITION : Los Angeles County Solid Waste Management
Committee/Integrated Waste Management Task
Force
Republic Services, Inc.
Recology, Inc.
Sierra Club California
Solid Waste Association of North America
Sustainability, Parks, Recycling and Wildlife
Legal Defense Fund