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: April 30, 2012
FISCAL: Yes HEARING DATE: May 14, 2012
URGENCY: No CONSULTANT: Peter Cowan
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 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 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. (Public Resources Code �43600).
2) 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. (�43601).
3) Requires the Integrated Waste Management Board (IWMB), by
January 1, 2008 to study and define the conditions that
potentially affect solid waste landfills in order to identify
potential long-term threats to public health and safety and
the environment. To 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).
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4) Requires the IWMB by July 1, 2009, to adopt 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].
5) 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 as an admitted
carrier or eligible to provide insurance through a surplus
lines broker currently licensed under the regulations of
the Department of Insurance; or
b) Is established by a solid waste facility operator to
meet the financial assurance obligations of that operator
and the insurance carrier:
i) Provides an insurance mechanism in compliance
with the requirements for specified in subdivision (d)
of Section 258.74 of Title 40 of the Code of Federal
Regulations.
ii) Is domiciled in the United States and licensed
in its state of domicile to write that insurance.
iii) 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) Maintains a rating of A- or better by A.M. Best,
or other equivalent rating by any other agency
acceptable to DRRR.
6) Establishes, on and after July 1, 2012, the State Solid
Waste Postclosure and Corrective Action Trust Fund, and
related program requirements (�48000 et seq.) if, on or
before January 1, 2012, letters of participation are received
from landfill operators representing at least 50% of the 2010
total waste volume of waste, and additionally:
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a) Requires, if the mandated participation level trigger
of 50% is reached, an additional $0.12 per ton fee will be
assessed for the participating operators on or after July
1, 2012.
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.
7) 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.
(Insurance Code �1216.1).
8) 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.
(Insurance Code �1763).
10) 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) Requires an issuer of an insurance policy that meets all of
the requirements of Public Resources Code �43601(e)(2) (See #5b
under Existing Law above) to be eligible to provide the
insurance described in that provision.
2) Prohibits an issuer of an insurance policy from being
required to be a California admitted insurer or be required to
provide the insurance through a surplus line broker.
3) Specifies that an insurance mechanism pursuant to Public
Resources Code �43601(e)(2) (See #5b under Existing Law above)
may not provide more than 75% of the statewide insurance
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obligation of a solid waste facility operator.
4) Repeals the above provisions as of January 1, 2017.
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 reduce 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 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
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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
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 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
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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 operator (or
provider), both of which reduce 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).
e) Captive Insurance is a form of Alternative Risk Transfer
(ART). ART mechanisms have grown 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.
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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.
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 United States.
3) Hazardous Waste . Regulations under the federal Resource
Conservation and Recovery Act have allowed the use of captive
insurance for over a decade. According to the Department of
Toxic Substances Control (DTSC) captive insurance has been
used as financial assurance for closure and postclosure at two
facilities, constituting $31 million worth of assurance, for
at least the past ten years.
In 2003 the BKK Corporation failed to pay the premiums on its
insurance policy with Steadfast Insurance (not a captive
insurer) eventually resulting in DTSC assuming responsibility
for the maintenance of its hazardous waste site in West
Covina, which the Legislative Analyst's Office LAO estimated
would cost the state an ongoing $5.5 million per year. In the
wake of this incident DTSC convened at least one workshop in
2005 to discuss financial assurance mechanisms and
specifically captive insurance. DTSC has not taken any
rulemaking action related to the use of captive insurance as a
financial assurance mechanism since that workshop. In 2006,
also in response to the BKK incident, the LAO issued a report
on financial assurance for closure and postclosure
recommending that captive insurance only be used when the
agency requiring the assurance conduct an annual review that
includes an evaluation of the financial health of the parent
company as well as an independent assessment by a third party
accountant.
4) Self Insurance and Oversight . Among the mechanisms available
for financial assurance demonstration (see Comment #2d), forms
of self insurance such as the financial means test, and
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corporate guarantee deserve extra scrutiny. The financial
means test allows a landfill owner or operator to demonstrate
adequate financial resources to meet the financial assurance
obligations. Likewise a corporate guarantee allows a landfill
owner or operator to demonstrate adequate financial resources
through a written guarantee from an affiliated entity, such as
a parent company. In the event that an owner or operator, or
in the case of the corporate guarantee, goes bankrupt the
insolvency of that single entity could result in inadequate
funds to cover the necessary maintenance or corrective action.
Under current law, DRRR is authorized to adopt regulations
reasonably conditioning the use of these mechanisms (see
Existing Law #2).
AB 480 requires DRRR to accept captive insurance, another form
of self insurance, as financial assurance demonstration.
Because the captive insurer is wholly owned and only provides
insurance to the parent company the captive insurer is more
exposed to financial condition of their only insured compared
to a traditional insurance company. Furthermore, it is not
uncommon for a captive insurer to loan back 50% or more of its
capital to the parent company, which increases the dependency
of the captive insurer on the parent.
AB 480 also limits the ability of DRRR to condition the use of
captive insurance by requiring DRRR allow the use of insurance
policy that meets all of the requirements of #5b under
Existing Law none of which fall under the purview of DRRR or
any other state agency. While existing law allows for DRRR to
request a third party audit of the captive insurer, it is not
possible for DRRR to condition the use of the insurer, nor
make additional requirements of the owner or operator if the
audit results are deemed unsatisfactory.
5) 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.
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6) Regulations . As mentioned in #5 above and under #7c 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 #5b 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. As of May 2012, no
rulemaking action has been taken.
7)Related Legislation .
a) AB 274 (Portantino) Chapter 318, Statutes of 2009,
establishes the State Solid Waste Postclosure and
Corrective Action Trust Fund (Trust Fund), and 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 DRRR receives, on
or before July 1, 2011, letters of participation from
landfill operators representing at least 50% 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
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operators to participate in the Trust Fund from July 1,
2011, to 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; and iii) 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).
8) Opposition Concerns . In general, opponents contend that DRRR
has repeatedly reviewed the use of captive insurance and found
it lacking. They express concern that with the 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.
9) Policy Considerations . If the Committee were to pass AB 480,
it should consider reducing the cap on the total statewide
financial assurance that can be provided through this
mechanism. Also, to evaluate how captive insurance works as a
mechanism for California, and to allow for Legislative review,
the committee could also consider requiring DRRR and the
Department of Insurance to submit a joint report on its use,
prior to the 2017 sunset.
10)Outstanding Issues . Because other provisions of law cannot
be overridden, the term "Notwithstanding any other law" on
page 2, line 7, must be stricken.
SOURCE : Waste Management, Inc.
SUPPORT : None on file.
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OPPOSITION : Los Angeles County Solid Waste Management
Committee/Integrated Waste Management Task Force,
Sierra Club California