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Potential Claims Against Mines Worry Financial Industry

Aug. 19 — The threat of third-party claims tied to the EPA’s looming financial assurance rule for hardrock mining is ginning up concerns among financial institutions, top surety backers and industry attorneys say.

The new Superfund rule may allow states, tribes, the public and federal agencies other than the Environmental Protection Agency to make claims against hardrock mining financial instruments, such as bonds and letters of credit, the EPA says.

That may raise risk to an unreasonable level, large institutions such as AIG, State Farm, Liberty Mutual and others recently told the agency. Industry attorneys supported that concern in interviews with Bloomberg BNA, arguing such language may jeopardize the availability of those instruments.

Dec. 1 Deadline

The U.S. Court of Appeals for the District of Columbia Circuit approved an agreement in early 2016 to force the EPA to complete the rule by Dec. 1 ( In re Idaho Conservation League, D.C. Cir., No. 14-cv-01149, 1/29/16 ).

The Superfund statute, the Comprehensive Environmental Response, Compensation and Liability Act, directed the EPA to complete a financial assurance rulemaking by 1984 making them more than three decades late.

Hardrock refers to minerals that contain gold, silver, iron, copper, zinc, nickel, tin, lead and other metals, as opposed to, for instance, coal. The assurances exist to cover any cleanup necessary after the mines are closed.

The EPA has indicated it will exempt certain categories of facilities, such as mines less than five acres and stream bed mines that don’t use hazardous substances.

Third-party Prospects

The EPA is “considering” assurance requirements to cover response costs for hazardous discharges or the threat of discharge, natural resource damages, and to cover health assessments, agency spokesman Melissa Harrison told Bloomberg BNA Aug. 18.

The public, alongside states, tribes and other government agencies, “could” claim directly against a financial surety, Harrison said, while pointing out that the agency has met with financial industry representatives.

EPA officials are now putting the finishing touches on a study to evaluate the ability of financial institutions to make available CERCLA-compliant sureties.

“The draft study report is currently undergoing internal review,” Harrison said. “EPA expects to make the report available before it issues the proposed hardrock mining rule.”

‘Threatened Release Too Subjective.’

That outreach, however, has seemingly left the financial industry apprehensive, according to a Surety and Fidelity Association of America said in a July 14 letter.

“The potential that multiple parties, other than EPA, can make a claim under the surety bond significantly enlarges the surety’s exposure to claims, and possibly dilutes the protection available to EPA to fund the response to a release or threatened release,” the organization’s General Counsel Robert Duke told EPA Assistant Administrator Mathy Stanislaus.

“Further, the triggering event should be the failure to fund the costs associated with a release. We submit that a ‘threatened release’ could be too subjective to define the bright line that marks when the surety’s obligations are triggered.”

Claim rights are likely to be limited to those entities rendering services at or near a mine, rather than public advocates contesting, for instance, environmental degradation, John Jacus, attorney with Davis, Graham and Stubbs LLP, told Bloomberg BNA in an interview.

Those eligible entities could include other potentially responsible parties under Superfund law, such as mine operators, Jacus said.

Despite reservations from the financial industry, mining companies would probably not be able to own up to all natural resource and heath damage liability, David Chambers, president of the Center for Science in Public Participation, told Bloomberg BNA. The center is a nonprofit corporation formed to provide technical assistance on mining and water quality to public interest groups and tribal governments, according to its website.

Moreover, such coverage would be globally unprecedented, he said, noting that current state and other federal agency assurance requirements for mining are geared solely towards reclamation.

“I’ll bet you a dime to the dollar the rule reflects present procedure, but I would love to see EPA come out and say you have to compensate all injured parties,” Chambers said. “They’ve been sitting on their hands for 30 years in terms of promulgating this sort of rule. For them to take that stance now would be almost unbelievable.”

Market Instability

Claimant latitude could cause significant uncertainty in the surety market, indicating financial institutions may require more higher-priced sureties, a number of mining experts said.

“The ramification of an overly conservative bond for the entity that needs to get the bond is that it costs more; annual costs simply go up for bonding that may not be serving any particular purpose,” Stephen Smithson, a lawyer with Snell and Wilmer, told Bloomberg BNA. “As it becomes a bigger bond and a bigger pool of money that third parties can make claims against, financial institutions begin incurring more costs defending against those claims. It just makes them a bigger target.”

Smithson and Chambers said financial institutions historically underestimated cleanup costs and, in the late 90s, had to pony up more money than expected tied to bonds, leading many insurers to leave the market.

The duration of the bond also is a critical consideration, said the surety and fidelity association.

“A surety bond with a long duration increases the risk to the surety,” Duke wrote to the EPA. “To compensate for the increased risk due to the diminished certainty of underwriting, sureties typically raise their underwriting standards, and provide long-term bonds only to the largest and most financially sound operators. We recommend that the implementing regulations should contain measures by which the surety can control the duration, such as a cancellation clause in the bond.”

For example, acid drainage requires water monitoring “in perpetuity,” Chambers said.

Self-Bonding

The EPA left the door open for self-bonding permission in outreach to interested parties and Bloomberg BNA, saying credit rating-based financial tests and corporate guarantees may be permissible.

Jacus said self insurance, accompanied by monitoring that could compel market assurances, helps to diversify industry options.

But the questionable ability of self-bonded coal operators to pony up cash for cleanup following bankruptcy has sparked controversy nationwide in recent months. Peabody Energy Corp., Alpha Natural Resources and Arch Coal Inc. have all gone belly up, potentially at the expense of remediation.

Chambers outright rejected that prospect for the hardrock mining industry.

“Self insurance is a bad deal. Once you allow a company to do that, and they get in financial trouble, there’s no way out,” said Chambers. “These are often the biggest companies out there. The attitude of the regulators has been ‘these are big companies; they’ll be good for it.’ But that hasn’t been the case.”

To contact the reporter on this story: Brian Dabbs in Washington at bdabbs@bna.com

To contact the editor responsible for this story: Larry Pearl at lpearl@bna.com/p>

For More Information

The financial institution letter is available at http://src.bna.com/hSM

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