hlorgan, Lewis & Bockius LLP 1111 Pennsylvania Avenue, NW Washington, DC 20004 Tel: 202.739.3000 Fax: 202.739.3001 ww~.rnorganlewis.corn



### November23, 

### 2005 

# Morgan Lewis

COUNSELORS AT LAW



### VIA FEDERAL EXPRESS AND VIA ELECTRONIC MAILTO:

Mr. Leonard Robinson Acting Director California DepartmentofToxic Substances Control 1001 "I" Street Sacramento. CA 

### 95812-0806 Re: 

### November29,2005

### Workshop on FinancialAssurance 

### - Comments on 

### Financial Test and Captive Insurance Issues Dear Mr. Robinson: On 

### behalfofthe RCRA CorrectiveAction Project and the Superfund Settlements Project (hereinafter collectively "the Projects"),this letter provides substantive comments in advance of DTCS's upcoming November29,2005financial assurance workshop focused onfinancial test issues and captive insurance issues. Wevery much appreciate the opportunity to comment onthese important issues as presented inthe DTSC'svarious discussion papers. As set forth below in greater detail,we believe that the DTSC discussion papers overall present an unduly negative view ofthe existing financial assurance framework for environmental cleanups. This letter presentsthe response of the Projectsto some of the major points made in the discussion papers. We hope that this responsewill stimulate further analysis and debate about these very important issues. 1. Background on RCAP and SSP The Superfund settlements Project ("SSP")

### and the RCRA CorrectiveAction Project ("RCAP") have worked since theirformation nearly 20 years ago to provide constructive inputto EPAand otherfederal and state agencies on critical

# Morgan Lewis

COUNSELORS AT LAW policy issues affectingthe cleanup of contaminated sites. The members of these two Projects include companies that maintain their corporate headquarters in California, companies that have substantial operations in California, and companies that are responsiblefor addressing contaminated sites in California. Moreover, each of the Projects' member companies has extensive experience with contaminated sites. Asjust one indicator of the scope of that experience, the members ofthe SSP alone havespent over $6 billion in the investigation and remediation of contaminated sites, including many sites in California, since the majorfederal and state cleanup programs began some 

### 25 years ago. On behalf of their members, the Projects are pleasedto submit thesejoint comments on the DTSC's discussion papers regarding two aspects of financial assurance: 

### (I) the financial test and (2) the use of captive insurance.
11. Issues Associated with the Financial Test. The Projects recognize that financial assurance is an essential element of the legalframework for cleanup of contaminated sites. Wefully support sound and reasonable requirements to provide such assurance. Despiteour strong support forfinancial assurance, we are deeply concerned that the DTSC discussion paper on the financial test isflawed in two respects: It overstates the perceived problemswith the test, and it suggests 

### a variety of regulatory changes that are unnecessary andwould not improve the program. A. The Current Framework Has Worked Well. The discussion paper candidly acknowledges that "there have been

# no instances where DTSC had to perform closure, postclosure, or corrective action activities where a facility ownerloperator using thefinancial test hasfailed" (emphasis supplied). Infact, DTSC's experience in this regard mirrors what has occurred throughout the United States. Thousands of sites undergoing either Superfund cleanup or RCRA corrective action have been addressed, in whole or in part. Yet we know of

# no reported instances where one of these sites became 

### a taxpayer liability because an ownerloperator or a potentially responsible party ("PRP") defaulted on its financial assurance mechanism.'
This highly successful track record to date is, of course, no guarantee against future defaults. But it is highly relevant to any analysis of whether the existing

1 In fact, something quite different occurredat the BKK Landfillsite in California. When the ownerloperator declared that itwas unableto continuefunding cleanup efforts, various PRPs at the site took over the project.

# Morgan

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COUNSELORS AT LAW framework for financial assurance is working well, andwhether any changes should be madeto that framework.*
B. Background onthe Financial Assurance Regulations At the outset, it is important to understandwhat "financial assurance" is meant to accomplish and how it works in practice. The regulatory framework was promulgated by EPA in 

### 1982. Those regulations addressed financial assurance for permitted RCRAtreatment, storage, and disposalfacilities ("TDSFs"), butthey have since been used by EPA and most states for Superfund sites and RCRA corrective action sites as Underthose rules, the owner/operators or PRPs who are responsible for closure, post-closure care, corrective action, or remediation (hereinafter generally "cleanup") must establish and maintain financial assurance for that work. Significantly, financial assurance is meant to bethe primary means bywhich a companyfulfills its cleanup obligations. Instead,financial assurance is meant to bethe back-up mechanism inthe unlikely event thatthe company is otherwise unable tofulfill those obligations.
The EPA rules,which today are part of the authorized RCRA Subtitle C program in virtually all States, require ownerloperators and PRPsto demonstrate financial assurance using one or moreof six mainoptions:

a trust fund; 

### a surety bond; a letter of credit;
r an insurance policy;
r a financial test; or
r a corporate guarantee. The detailed requirements for these six mechanisms fill some 55 pages inthe Codeof Federal Regulationsat 

### 40 C.F.R. Part 

### 264, Subpart 

### H.~

2 The discussion paper's references to the Enron and Worldcorn accounting scandals, which did not involve any environmental liabilities, are distracting and unhelpful. No legal mechanismcan prevent the commission of fraud by someone determinedto engage in fraudulent conduct. The fact that some companies manage to defraudtheir creditors is hardlyan indictment of the current framework governing financial responsibilityfor environmental cleanup liabilities. 3 The RCRA rules are legally applicable only to TSDFs. EPA has decided, as a matter of policy, to requirethe same financial assurance mechanismsat RCRAfacilities undergoing corrective action and at Superfund sites as well, usingjudicial consent decrees, unilateral administrative orders, and administrative orders on consent to incorporatethe RCRA rules for TSDFs. 4 Although the financial assurance rules are lengthyand detailed,they are not nearly as complex as many other EPA RCRA rules, such as the definition of "solid waste."

# Morgan 

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COUNSELORS AT LAW For financially strong companies, EPA's regulations provide low-cost mechanisms such as the financial test, which relies upon the inherent strength of the company to assure performance of its obligations. For less-strong companies that could not qualify for the financial test, EPA's rules provide costlier mechanisms, such as letters of credit and surety bonds,to minimizethe possibility that the liabilities ofthese companies would be shifted to the taxpayers. In other words, EPA recognized that different financial assurance mechanisms are appropriate for different companies, depending upontheir size and strength, among other factors.
The financial test mechanismwas adopted by EPA only after a careful analysis of competing considerations and supporting evidence. For example, EPA decided to usefairly simple measuresto evaluate financial performance for the purpose of determining whether a company would beable to cover its cleanup obligations. These include readily available measures such as a company's bond rating, its tangible net worth, and its networking capital. The 

### EPA financial test is also quite conservative. It requires either: a bond rating of

### a certain gade5plus tangible net worth of at least $10 million plus nettanqible worth of 6 times total remediation liabilities ("Alternative II"),

# or
two ofthree other factors 

### plus tangible networth of at least $10 million 

### plus networkinq capital (i.e., liquid assets) of 6 times total remediation liabilities ("Alternative I"). Putting aside for a momentthe other factors included inAlternative I,these are very conservative measuresfor evaluating whether 

### a company can pay its debts as they come due. Wediscuss some of these measures below in greater detail. In particular, Alternative Il's reliance on bond ratings should give environmental regulators a high degree of confidence that businessfailures are unlikely for at least the next several years. The major bond rating agencies monitor boththe market conditions and the individual circumstances of the companies they rate on a continuous basis. They normally update their ratings eachyear, but any time there is a significant change, either in the market or in the company itself, they tend to perform a more thorough review and then update their rating as warranted.

5 The bond rating of the ownerloperator reflect the expert opinion of bond rating services and evaluates the firm's financial management practices. The rating firms, S&P and Moody's, are well respectedand widely utilized sources for credit ratings.

# MorganLewis

COUNSELOklS AT LAW C. Concerns About the FinancialTest are Overstated. The discussion paper gets off on the wrongfoot by suggesting thatthe financial test "provides absolutely no certainty as to the amount or the availability of funds." Although "certainty"is an elusive goal in most human endeavors, the financial test actually provides a robust assessment of the current financial strength of a company and also of the likelihood that it may undergo financial deterioration inthe next several years. In that regard, the financial test was specifically designed to cover a 3-year "lookahead" period. EPA determined that companies qualifying for the financi,altest are highly unlikely to seek bankruptcy protection or otherwise default over the next 3 years. This 3-year "look-ahead" aspect is a central feature ofthe financial test, but it has often been overlooked inthe policy debate on financial assurance. Because a company must re-qualify again every year if it wishes to keep using the financial test, there is always at least a 2-year "look-ahead" period during which a default is highly unlikely. Infact, 

### EPA has reviewedthis issue several times (e.g., in connection with financial assurance for municipal solid waste landfills),and has reaffirmed its original analysis.


### D. The Suggested Changes to the Financial Test Are NotJustified. The discussion paper suggests four possible changes to the financial test. We address each ofthese separately. In Section Il-F below,we also address some ofthe costs and burdensthat would be associated with rulemaking aimed at implementingthese changes.


### 1. The $10 MillionTangible NetWorth Requirement Should be Preserved.
In its 1982 RCRA rulemaking, 

### EPA concluded that 

### a company meetingthe requiredthreshold of $10 million in tangible networth was extremely unlikely to declare bankruptcy at anytime inthe next 3 years. In otherwords, the financial test is constructed to screen out companies that havea significant risk of declaring bankruptcy at anytime in the next 3 years. The discussion paper says that "not adjusting the $10 milliontangible networth requirement to reflect inflation has substantially increasedthe risk of bankruptcy." No support for this statement is offered, perhaps becausethe statement was thought to be simple common sense, but infact it is incorrect. EPA'soriginal analysis has actually been revisited on several occasions - most notably in the late 1990s, in connection with the development of financial assurance rules for municipal solid waste landfills -and its validity has been reaffirmed each time. See, e.g.,63 Fed. Reg. 17,706, l7,7I

### 5-18 (April 10, 1998) (discussing comments and explaining retention of $10 million standard in final rule on financial assurance for municipal solid waste landfills);50 Fed. Reg.

# MorganLewis

COUNSELORS AT LAW 30,201 (July 1, 1991) (proposing certain revisions to Alternative 

### I, but not proposing to modifythe 

### $10 million standard). EPA iswell aware of the fact of inflation. Given EPA's recent review and retentionofthe 

### $1

### 0 million tangible net worth requirement, substantial further analysis is requiredto support any upward adjustment in this standard.


### 2. Assets Usedas Security Should Not Be Excludedfrom the Computation ofTangible NetWorth for Companies with Bond Ratings. The discussion paper suggests that assets pledged as security for indebtedness should not count toward the tangible networth requirements in the financial test. We have significant reservations about this approach. Companies that qualify for Alternative II based on their published bond ratings should not haveto adjust their tangible networth in this manner. The bond ratings already take into account all oftheir assets and liabilities, including both the netvalue of pledged assets and also the debt secured bythose assets. For companies with sufficiently strong bond ratings to useAlternative II,there is little pointto fine-tuning the computation of tangible net worth inthis fashion.


### 3. The Altman's Z Score Option Should Not Be Required. For the reasons presented bythe American Chemistry Council in its separate comment letter to DTSC dated November 

### 14,2005,we believe that this suggested change is unsupportedand unwise. 

### In particular, companies with published bond ratings that qualify for Alternative 

### II ofthe financial test should not be subject to duplicative evaluations of their credit-worthiness.


### 4. Any Change to Line 

### 1of the DTSC Financial Test Form Should be Carefully Reviewed. Companies usingthe financial test are typically required to disclosetheir other environmental liabilities, includingthe specific cost estimates for each 

### ofthe other sites involved, regardless of which state(s) those facilities are located in. The discussion paper suggests that, in addition, companies should report the regulatory cost amounts and third-party liability amounts for out-of-state facilities "to the extent the ownerloperator is usingthe financial test to guarantee those obligations." In otherwords, a company using thefinancial test for its closure obligations at facilities in both California and Texas would be required to report the total amount of those obligations on Line 

### 1 of DTSC'sfinancial test form. We do not object to this change, so long as it is limited to those out-of-state obligations for which the companv is usinqthe financial test.

# Morgan

# Lewis

COUNSELORS AT LAW 

### E. The "Negative Assurance" Issue Does Not Mandate Rulemaking to Changethe FinancialTest. The workshop materials also suggest that changes to the financial test are needed because of the negative assurancelagreed-upon procedure issue. Specifically, the DTSC issues paper states that "the Department is prohibited by law from accepting the agreed upon procedures in lieu of the negative assurance." We believe that this is incorrect.
The current regulatory ,situation is admittedly somewhat unusual. EPA's 1982 RCRA financial assurance rules require each company relying uponthe financial test to submit a special reportfrom its independent certified public accountant. That special report must include a statement that he has compared the

, company's audited financial statements with the letterfrom the company's chief financial officer summarizing certain data from those statements and that "no matters came to his attention which caused himto believe that the specified data should be adjusted." 40 C.F.R. 

### § 264.143(f)(3)(iii)(b) (2005).
This statement that "no matters cameto his attention" is commonly referred to as the "negative assurance" by the accountant. The wording ofthe DTSC regulation is virtually identical, 22 Cal. Reg. 

### § 66264.143(f)(3)(C), and most other states have adopted this language as well, either through incorporation by reference or otherwise.
In 1995, the Auditing Standards Boardof the FASB issued new standards that effectively prevented accountants from giving negative assurances in cases where the client and the independent accountant enter into an agreement that defines the scope of the accountant's work. This created some regulatory tension, because companies usingthe financial test were supposed to provide "negative assurances" from their accountants, butthe accountants were no longer able to renderthose "negative assurances." Eighteen months later, EPA issued a memorandum designed to address this problem. Inthis 1997 memorandum, EPA stated that it intended to address the situation through rulemaking and, in the meantime:
"EPA will accept a CPA's report describing the procedures performedand related findings, including whether or notthere were discrepancies found in the comparison, based on an agreed-procedures engagement performed in accordance with [the new standards].



### . 

### . . The Agency will regardthis report as satisfying the requirements of the financial test



### . . 

### .for a special report by an independent CPA

. 

### . . ." Although the resulting situation is not ideal, it provides the regulated community with practical guidance on how to maintain their compliance pending further

# Morgan Lewis

COUNSELORS AT LAW action by EPA to address the issue. 

### DTSC has suggested that it lacks discretion to take an approach similar to EPA's,and that it must engage in rulemakingto modify the financial test. We believe this suggestion is unfounded.
This entire issue arises from the RCRA Subtitle Cfinancial assurance regulations that were issued by EPA and then adopted byvirtually all States in order to obtain program authorization under section 3006 of RCRA. The DTSC rules are thus closely patterned on the EPA template rules. With regard tothe "negative assurance" issue, the two sets of rules are virtually identical. DTSC states that "[tlhe Department does not have the discretion to accept an agreed upon procedures statement [because it is] less stringent that the express requirements of State andfederal regulations." We agree that as a condition of program authorization, DTSC's RCRA program must be at least as stringent as the federal program. Butthere is no issue here of stringency. With regard to the negative assurance issue, DTSC's published regulations are every bit as stringent as the federal regulations. So DTSC has satisfiedthe requirements of RCRA 

### § 3006.
The real issue here is one of enforcement discretion. EPA has clearly stated that inview of the current disconnect between the RCRA rules and practices of the accounting profession, it will accept an agreed upon procedures statement as satisfying the negative assurance requirement for the independent accountant's report. We knowof no impediment to DTSC adopting this same approach. In fact, DTSC's enforcement discretion allows itto do precisely what 

### EPA has, done pending a more satisfying long-term resolution of this issue.
In sum,the "negative assurance" issue does not compel any rulemaking 

### by DTSC to revise its financial test regulations. 

### F. More StringentFinancial AssuranceWould Comeat

### a Cost. The discussion paper reveals a policy preference for requiring more liquid forms of financial assurance for virtually all cleanup obligations. Unfortunately,the discussion paper looks only at the asserted benefits of morefinancial assurance, and does nottake into accountthe costs. As we show below,those costs are substantial. They include not only the out-of-pocket cost of acquiring more financial assurance, but also the uncertainty and delay that would attend any effort to rewrite RCRA rules that have been on the books for morethan two decades. To begin with, if the financial test were eliminated, as the discussion paper suggests it could be,then the actual out-of-pocket cost of liquid financial assurance mechanisms could exceed 

### $1 billion per year on a nationwide basis. The universe of sites to be addressed nationwide includes at least 5,000 sites (Superfund 

### NPL sites plus RCRA TSDFs plus RCRA corrective action sites that

# MorganLewis

COUNSELORS AT LAW are not TSDFs). Using an average cleanup cost figure of $10 million, which is probably on the low side, the total cost of the work to.be performed may be in the range of 

### $50 billion. Not all of that work will be performed in California, but a very significant fraction of it will be.
The estimated annual cost of a letter of credit, often considered the least costly financial instrument, is approximately 3% of the amount being guaranteed. Thus, if letters of credit were to be required, then the total amount of money that would be paid to the issuing banks and other institutions in any given year would be roughly 

### $1.5 billion on a nationwide basis6 Before any costs of this magnitude are imposed, it would be essential to analyze boththeir benefits and their costs. Moreover, every dollar spent onfinancial instruments is a dollar that is not available for capital improvements such as new plants, proactive investment in pollution control equipment, and the like. This is not only a matter of decreased return to shareholders on their investment; it also affects the amount of money available to run the business. Apart from these out-of-pocket costs, there is also the uncertainty and confusion that would result from changes to the existing framework for financial assurance. EPA's existing financial assurance requirements were adopted.through noticeand-comment rulemaking in 

### 1982. Sincethat time, the very detailed provisions of these regulations have been built intothe authorized RCRA programs of 

### 48 ~tates.~ These provisions have also been built into numerous RCRA and 

### HSWA permits, as well as into many RCRA and CERCLA consent decrees and other enforceable agreements. Any revisions to the baseline financial assurance regulations would also entail a protracted processthat will generate greater confusion and uncertainty. Experience teaches that the RCRA rulemaking process (and any judicial review) will take a numberof years to complete.
In sum,the process of revising thefinancial assurance rules would bringwith it substantial costs, as well as delay and uncertainty. This is not a process to be undertaken unlessthere is strong reason to believethat a significant problem needs to becorrected. Forthe reasons previously stated, we believe that no such problem exists.

6 The actual amount might be less if the PRPswere permitted (asthey are under current RCRA rules)to reducethe amount of the letterof credit eachyear as the cost of the remaining cleanup work decreased. 7 In many States, the EPA requirementswere incorporatedby reference. In other States, theywere specifically enacted by the legislature.

# MorganLewis

COUNSELORS AT LAW 

### Ill. Issues Associatedwith Captive lnsurance Turning now to captive insurance, the DTSC discussion paper states that "captive insurance does not provide the same safeguards as the financial test" because "[tlhere is no annual review ofthe financial health of.

. 

### .the captive



### . . . ." This statement proves too much, because it is true of liability insurance, not just captive insurance. In other words, the facility obtains an insurance policy and the environmental regulatory agency does not conduct an annual review of the financial health of the insurance carrier. Yet EPA, DTSC, and virtually all state environmental regulators recognizethat liability insurance is an important option for many facilities seeking to demonstrate financial responsibilityfor various cleanup obligations. Therefore, it is essential to focus on whether captive insurance is, in fact, so different from other types of insurance that its regulatory status should be different. We believe the answer is "no."
At the outset, it is important to understand what captive insurance is and how it works. Inessence, a subsidiary corporation is establishedto write insurance for sits parent entity.' This arrangement allows the parent to avoid the uncertainties and cost fluctuations of the commercial insurance market by having its insurance needs met by an entity subject to its control.
"Such captives are usually set upfor one of three reasons:one,the risk is otherwise uninsurable, inwhich event there is a sound business purpose behind such procedure; second, the parent seeks to save money on premiums, in which event, assuming its judgment is sound, more profit remains 

### in the parent which will betaxed; third, the parent company may not qualify [to write insurance] under the laws ofthat state, requiring a subsidiary company to be establishedfor that purpose." Appleman on lnsurance Law & Practice § 10999 (Matthew Bender2005). Captive insurance is a sophisticated and legitimate financial strategy that benefits the large and medium-sized insurance consumer by providing it with greater control over its risk programs,the abilityto achieve cost savings and efficiencies that are passed on throughout its organization, and the opportunity to customize the type(s) of insurance coverage that it purchases. The captive insurer, in turn, is free to tap the reinsurance market directly in order to spread its potential liabilities more broadly.

8 "Captive insurancecompanies are typically closely-heldcompanies whose insurance business is supplied and controlled by the owners, in which the original insureds are the principal beneficiaries." Business lnsurance Law & Practice Guide § 26.03[1] (Matthew Bender2005). A captive insurance company is commonly formed as a sister company to the insured,e.g.,as asubsidiary of the parent holding company that owns the insured.

# Morgan

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COUNSELORS AT LA'V Captive insurance has grown dramatically in recent years. Roughly half ofthe 

### 50 States have statutes s ecifically allowing captive insurers to be chartered as insurance companies.' 'Thesix leading domiciliary states actively market their competitive advantages onWeb sites, at trade conferences, and through relationships established with trade groups.



### . . . Vermont emphasizes that it is the third-largest captive insurance domicile in the world and the numberone in the United States, with an insurance department that has morethan 20 years of experience in regulation [risk retentiongroups.]"'0 We turn nowto the 

### 4 questions that 

### DTSC raised in its workshop materials.
1. 

### Does captive insurance provide the 

### samelevel of assurance asthird

### party insurance? The level of assurance provided by

### any insurance contract depends upon the financial strength of the issuer, be it a captive insurer or a third-party carrier. So long as the insurer has sufficient resources to meet its expected payments, the level of assurance provided is also sufficient. The discussion paper suggests that "captive insurance lacksthe essential characteristics oftrue insurance [i.e.,] risk-shifting and risk-distribution." As support for this proposition, 

### DTSC quotes dictum from Arnerco, Inc. v. Commissionerof Internal Revenue, 979 F.2d 162 (gthcir. 1992),a tax case involving insurance contracts between sister corporations. Infact, the Arnerco court ruled that such contracts didinvolve both risk-shifting and risk-distribution, andthus constitutedtrue insurance. Accord, Humana Inc. 

### v. Commissionerof Internal Revenue, 881 F.2d247 (6th Cir. 1989).
It is noteworthythat the cases analyzing whether captive insurance qualifies as 'insurance" are tax cases, where all that is really at stakethere is the deductibility of the premiums paid bythe parent corporation. Wherethe tax casesfind that captive insurance is not "insurance,"they do so becausethe parent's balance sheet will ultimately reflect any decrease in value suffered bythe captive insurer when it pays the liability or loss of the parent. Appleman on Insurance Law & Practice § 10999 (Matthew Bender 2005).
This may make sense as an accounting matter, but it has no bearing on whether captive insurance provides "insurance"for purposes of demonstrating financial assurance. Thus, the discussion paper is wrong when it says that "thefinancial stability of the [captive insurer] is completely dependent on the financial health of the parent." Every captive insurer is a separate corporation, and must be adequately capitalized to meet its anticipated obligations. Moreover, captive insurers can be rated for financial strength by

### AM Best, S & P, and Fitch rating

9 U.S. Government Accountability Office, Risk Retention Groups 29-30 (2005) (GAO-05- 536).
'O Id. at 44.

# Morgan Lewis

COUNSELORS AT LAW services. Such ratings involve annual reviews of the captive's operations, reviews of their audited financial statements, and reviews of their reinsurance programs. So the financial stability of the captive is separate and distinct from that of the parent, and can be assessed and ratedon a separate basis. Similarly, the discussion paper is wrong when it says that "a failure ofthe parent

.



### . .will necessarily cause a failure of the captive insurer." For one thing, the captive insurer may have spread its liability risks through the reinsurance market, giving it access to added coverage. Morefundamentally, a reversal in the fortunes of the parent does not "necessarily cause a failure of'the subsidiary. If the subsidiary was undercapitalized, then it would not be recognized as a separate legal entity in thefirst place.


### 2. Shouldthe use of captive insurance be allowed? 

### We know of

# no factual basisfor treating captive insurance differently than thirdparty insurance. Specifically, we know of

# no instance inwhich a captive insurer has failed, resulting in a default on environmental cleanup obligations of the parent.
3. What assurance is provided bythe licensing processfor captive insurers inVermont andother states? Would additional benefit be provided by requiring captive insurers to belicensed inCalifornia?
In response to the first question, Vermont's regulatory framework for captive insurance companies should serve as a model for strict standards. 

### The licensing requirements are rigorous. Once a captive insurer is approved, Vermont maintains close oversight of all company operations and requires pre-approval of any change inthe plan ofoperations. Underthe Vermont program, other key requirements include: audited financial statements; actuarial certification of loss reserves, calculated by an approved actuarialfirm; a statutory annual report including financial and insurance operational information; parent companyfinancial statements; and biographical affidavits outlining the background of every officer, director and key employee. In responseto the second question,we believe there is no basis to require captive insurers to be licensed in California simply because they provide coverage for one or more facilities located in California. The reason is grounded in our federal system of government.

# Morgan

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COUNSELORS AT LAW Specifically, insurance is regulated at the State level, but each State typically accepts the insurance contracts of companies that are licensed to write insurance in other States. Any other approach would be chaotic and would ultimately impose a huge burden on interstate commerce. For example, many property and casualty companies are chartered in Connecticut, and yet their insurance contracts are accepted everywhere inthe United States. The reason for this is notthat thejudgment of the insurance regulators in Connecticut is infallible. Rather, the reason is that it is unworkable for each State to review and supervise economic activity that is primarily underthe jurisdiction of another State. Ifeach State decided to require that TSDFs obtain insurance from carriers (captive or otherwise) licensed inthat particular State, the result would be complete chaos inthe insurance markets. Such protectionism would be both unlawful (as an undue burden on interstate commerce) and also unwise. 

### 4. 

### Should the use of captive insurance be limited to certain types of assurance? 

### Forexample, liability only.
We see no principled basis for limitingthe useof captive insurance to certain types offinancial assurance. 

### IV. 

### Conclusion The Projects believethat the current financial assurance regime hasworked well for the past 

### 25 years. Thousands of sites have beencleaned up, in whole or in part, with most ofthe work performedand funded by owner/operators and PRPs. All of thiswork occurred underthe existing financial assurance mechanisms. Moreover, we knowof no site that "defaulted"to the taxpayers due to 

### a failure of those mechanisms. This track record demonstrates that things are working well.
It is always possible that new problems will emerge in the future that require modification of the existing framework. But with so much at stake for all concerned, we see little need to make major changes simply because something might go wrong tomorrow. Thank you in advancefor your consideration of ourviews. Very truly yours,

John Quarles

Michael W. Steinberg 

# 6 Counsel to the Projects

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COUNSELORS AT LAW

cc: 

### Watson Gin, DTSC (via E-mail) Jeff Mahan, DTSC (via E-mail) Stephen Hammond, 

### P.E., NY DEC (for ASTSWMO) (via Federal Express) 

### A. Stanley Meiburg, EPA Region 4 

### (for 

### EFAB) (via Federal Express)