UST | FR | Alternative Forms of FR

UST Financial Responsibility (FR)

Alternative Forms of UST Financial Responsibility

Revised On: Dec. 13th, 2024 - 07:45 am

Financial Test of Self Insurance

This mechanism keeps the risk of loss or damage "in-house" with the owner/operator, leaving them responsible for covering the costs of a UST incident. To qualify, the owner/operator must pass a test of self-insurance which will require them to demonstrate at least $10,000,000 of "tangible net worth".¹

Trust Fund

Under a fully-funded trust fund, money for cleanup and third-party liability costs are held and administered by an impartial third party. The fund can be used to fulfill the entire amount of financial assurance, or it may be combined with other mechanisms to fulfill the deductible amount of an insurance policy. Owners/operators using fully-funded trust funds must provide the full amount of the assured costs. If the fund is the sole means of demonstrating financial responsibility, for example, they must provide the entire annual aggregate amount required to be assured. Banks acting as trustees of funds typically impose annual administrative maintenance charges between 0.1 and one percent.²

Standby Trust Fund

Funds for corrective action and third party liability are administered by an impartial third-party through this mechanism. A standby trust cannot be used alone as a financial responsibility mechanism, but must be combined with another third-party mechanism (e.g., letter of credit, guarantee, or surety) to fund the trust. Prior to funding the trust, the bank will likely charge a fixed fee to keep the trust active, in addition to any ongoing annual administrative fees.³

Guarantee

A guarantee is a promise by a third party to fund a standby trust fund if ordered to by ADEQ. However, the owner/operator remains primarily responsible for paying corrective action and third party liability claims. The guarantor is required to make payments only after the owner/operator has failed to meet performance requirements. Guarantors must qualify for self-insurance using the financial test of self-insurance (see above). A guarantee must be combined with a standby trust fund (see above) to meet financial responsibility requirements.⁴

Surety Bond

This is a guarantee by a surety company that it will meet the obligations of the owner/operator, either by performing corrective action or making payments. Surety bonds are:

issued by a licensed surety rather than a bank, and
generally issued to cover a lack of performance rather than default on a financial obligation.

Surety bonds typically cost about two percent of the surety amount. A surety bond must be combined with a standby trust fund (see above) to meet financial responsibility requirements.⁵

Letter of Credit

A letter of credit is a contract between three parties: (1) the issuer [normally a bank], (2) the principal [the owner/operator], and (3) a third party [ADEQ]. By issuing a letter of credit, the issuer (bank) promises to pay a certain amount to the third party (ADEQ) in the event that the principal (owner/operator) fails to meet an obligation. In this case the obligation would be to cover the costs of corrective action in the event of a spill. The cost of a letter of credit can vary in range from one to 15 percent, with a typical charge of about three percent. A letter of credit must be combined with a standby trust fund to meet financial responsibility requirements.⁶

Certificate of Deposit

A certificate of deposit (CD) is a written acknowledgment of the receipt of a sum of money on deposit for a pre-specified period of time, which the depositary institution promises to pay to the depositor, to the order of the depositor or to some other person. An owner or operator should deposit CDs into a trust fund, escrow account or government fund. An owner/operator should deposit funds to cover the full required amount of coverage, unless the CD is being used in combination with other mechanisms.⁷

Submission Note: In addition to the UST Financial Responsibility information requested in myDEQ, owners obtaining a Certificate of Deposit must also provide proof of funds to cover the full required amount of coverage ($1,000,000), unless the CD is being used in combination with other mechanisms.