Federal Register Superfund Response Action Contractor Indemnification Vol. 58, No. 14 58 FR 5972 Monday, January 25, 1993 AGENCY: ENVIRONMENTAL PROTECTION AGENCY (EPA) DOC TYPE: Notices NUMBER: FRL-4555-3 January 25, 1993. CONTACT: FOR FURTHER INFORMATION CONTACT: Rick Colbert, (703) 603-8932. Rick Colbert, U.S. Environmental Protection Agency, 5502-G, 401 M Street, SW., Washington, DC 20460. Final guidelines. The Environmental Protection Agency (EPA) is issuing final guidelines to implement section 119 of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986 (42 U.S.C. 9619) and Public Law 101-584. Section 119 provides the President with discretionary authority to indemnify response action contractors (RACs) for releases of a hazardous substance or pollutant or contaminant arising out of negligence in conducting response action activities at sites on the National Priorities List (NPL) and removal action sites. As delegated by the President, EPA has authority to extend indemnification to RACs working at NPL or removal action sites for EPA, states, political subdivisions of states, federally recognized Indian tribes, and potentially responsible parties (PRPs). WORD COUNT: 22,989 TEXT: SUPPLEMENTARY INFORMATION: Detailed Summary of Final Guidelines: Diligent Efforts: To be eligible for indemnification by EPA, a RAC must have made diligent efforts to obtain insurance coverage from non-federal sources. Under a multisite contract, the RAC must agree to continue to make such diligent efforts each time it begins work at a new site. Prime contracts: For future contracts, EPA does not intend to offer any indemnification unless it did not receive a sufficient number of qualified bids or proposals, and the lack of response can be linked to the absence of indemnification. In such a situation, EPA may issue a new or amended solicitation and offer indemnification. RACs with EPA indemnification coverage under current contracts will be offered coverage under these guidelines. They may negotiate with EPA on the limit and deductible, but the upper limit that they may choose from is determined by the dollar amount of the contract. Coverage of $75 million is the top limit (with co-payments above $50 million), and it is available for RACs with contracts of long duration (greater than five years) only. The maximum top limit for other RACs is $50 million. A $15 million aggregate limit per cost-reimbursement contract of long duration (greater than five years) will be added to provide indemnification solely for specialty subcontractors with $5 million as the maximum amount available on any one subcontract. Innovative technology RACs: For current contracts and new contracts {pg 5973} where indemnification is offered, the RAC who provides innovative technologies during remedial action (RA) construction may select from a range of limits. However, the deductibles associated with a specific limit will be lower for these contractors than for other contractors. Eligible RACs may be prime contractors or subcontractors (receiving indemnification from the prime contractor) under fixed-price contracts or subcontractors under cost- reimbursement contracts. PRP RAC contractors: These RACs will not receive EPA indemnification. SITE Participants and CERCLA 126(g) hazardous workers training grantees: These RACs may be offered indemnification, but the upper limit available to them will be lower than for other RACs. In addition, the deductibles associated with those limits will be lower than for other RACs. Term of coverage: The term of coverage will be ten years. Surety firms: Firms that provide performance bonds inherit the indemnification agreement of the defaulting RAC if the bond is activated. Renegotiating existing contracts: EPA believes that given the temporary nature of indemnification under its interim guidance (OSWER Directive 9835.5), i.e., the statutory requirement for promulgation of final guidelines subject to public comment, RACs understood that this protection lacked any permanence and was offered on a "claims made" basis. EPA will terminate the contracts of RACs who do not agree to modify the indemnification terms under their existing contracts so that they are consistent with the final guidelines. I. Introduction These guidelines meet the statutory requirements of CERCLA section 119(c)(7), which requires the development of guidelines to implement CERCLA Sec. 119 before promulgation of regulations. Since october 1987, EPA has offered indemnification to RACs under an interim guidance, OSWER Directive 9835.5, "EPA Interim Guidance on Indemnification of Superfund Response Action Contractors Under Section 119 of SARA." The interim guidance required a $100,000 deductible, but it did not state a limit in coverage for the indemnification as required by CERCLA section 119. The interim guidance did not attempt to assess whether indemnification is necessary to encourage RAC participation in the Superfund program, and it assumed that EPA's indemnification is an adequate substitute for insurance. In the spring of 1989, EPA sent letters to the then- current RACs stating that it had determined that some insurance may be available. The letter instructed the RACs to make diligent efforts to seek insurance from the private sector and forward proof of their diligent efforts to the EPA contracting officer. On October 31, 1989, EPA published proposed guidelines in the Federal Register (54 FR 46012) and requested public comment. EPA stated that during an information gathering process, it had not been able to gather adequate information to determine the amount of insurance (coverage) that any particular RAC should maintain. EPA further stated that it had not been able to determine the extent to which indemnification should be offered to meet the Agency's objectives, if at all. As stated in the proposal these objectives are: Provide RACs with a temporary comparable substitute for commercial pollution insurance, in the absence of affordable and adequate commercial insurance coverage or other viable private sector risk transfer mechanisms; Encourage the insurance industry to provide RACs with adequate and affordable pollution insurance products; Encourage the development of other private sector mechanisms that provide RACs with adequate and affordable prospective pollution risk transfer mechanisms; Maintain EPA's fiduciary responsibility to ensure that the Superfund monies are used to clean up sites to the maximum extent possible; Assure that an adequate pool of qualified RACs will be available to keep the Superfund program operative; Maintain strong RAC incentives to prevent and reduce RAC induced release incidents throughout a given Superfund response action contract; Maintain strong RAC incentive to continue to seek commercial insurance coverage and/or develop alternative risk transfer mechanisms. EPA stated that the indemnification limit and deductible scheme should be based on the assumption that the RAC itself is best able to determine its required level of insurance or indemnification coverage. However, EPA believed that the RAC will overstate its required indemnification limit unless a disincentive to overstate is included. Therefore, EPA proposed tying the size of the deductible to the size of the limit. EPA proposed a "sliding scale" for cost-reimbursement contracts; these are the contracts under which contractors work on EPA-directed tasks on an hourly basis and are reimbursed for costs incurred while performing the work. The contracts are multi-site, with the work at various locations determined after contract award through work assignments issued by EPA. Under the proposal, a RAC could choose a coverage limit it believed it needed up to $50 million. However, as the limit increased, the deductible would also slide upwards; the deductible paired with a $50 million limit was $3.5 million. For RACs with fixed-price contracts, i.e., Army Corps of Engineer remedial action (RA) contracts, state-lead contracts, and removal site-specific contracts, EPA proposed market incentives to encourage RACs not to request EPA indemnification. That is, EPA would put a value on its indemnification, either as a price charged to the RAC or as an adjustment to a bid reflecting the amount of indemnification requested by a RAC. The General Accounting Office (GAO) in a 1989 report to Congress, "SUPERFUND: Contractors Are Being Too Liberally Indemnified by the Government," recommended that EPA attempt to use the procurement system to see if RACs would work at EPA sites absent indemnification. EPA believed that the use of market incentives to encourage RACs not to ask for EPA indemnification paralleled GAO's recommendation to use the market place to help meet EPA's goals. EPA concurred with the GAO recommendation and believed that this approach would maintain EPA's responsibility to ensure that Superfund monies are used to the maximum extent possible to clean up sites, and at the same time maintain an adequate number of contractors willing to work at EPA sites. EPA concluded in the proposal that "given the limited data which EPA has had available to it in shaping this scheme, the Agency is particularly interested in receiving further information that may support this or alternative schemes." EPA received a variety of comments on the proposal; almost all comments were negative. In the summer of 1990, EPA retained a third-party facilitator, Endispute Incorporated, to meet and interview representatives of interested parties to attempt to gain insight into commenters" views. The facilitator met with representatives of EPA, including personnel from the Office of Emergency and Remedial Response, the Office of Waste Programs Enforcement, the Office of General Counsel, and the Office of Policy, Planning, and Evaluation. The {pg 5974} facilitator met with representatives of the Army Corps of Engineers and the Office of Management and Budget. The facilitator also met with representatives of external groups such as trade organizations, RAC interest groups, and the insurance industry. On February 14, 1991, Endispute presented its report to EPA, "Report on the Results of the EPA-Sponsored Consultation Process on the Proposed Guidance for Section 119 of CERCLA, as Amended." A copy of the report is in the docket for this notice. The report further clarifies the commenters" positions, which are stated in the Response to Comment section of this notice. In short, commenters asserted that the limits were too low and the deductibles were too high. Most commenters also linked the perceived low limits to a possible negative effect on subcontractors hired by EPA's prime contractors. Most commenters stated that if the prime contractor does not believe that it has adequate coverage, it will not be willing to share any of its indemnification with its subcontractors. Despite the large number of comments, commenters did not provide additional factual information that would support any specific alternative indemnification scheme. Commenters reiterated the risks that are perceived to be associated with hazardous waste sites. In short, these risks are: Superfund sites present high risks to people and property. Remediation technology is new and continually changing. The statute encourages the use of innovative technologies. Underground work is inherently risky. EPA, which is subject to community and other socio-political pressures, does not always accept the RAC's recommendation for the best method to clean up the site. A large majority of commenters recommended an upper indemnification limit of $200 or $250 million, but did not present a factual basis for their recommendation. These commenters stated that these higher limits are needed to protect the RAC from a possible catastrophic claim. However, all parties acknowledged that there has been no such claim in the history of the Superfund program. The few potential claims that EPA has received under section 119 or under the Federal Acquisition Regulation (FAR) indemnification (that preceded Sec. 119 indemnification) have all been relatively small dollar amounts. Some commenters stated that EPA should not offer indemnification, and that RACs should bear all responsibility for their negligent actions. Inquiries made by EPA have revealed that some RACs are willing to work for other federal agencies, states, and PRPs without indemnification or with very low coverage. The Agency was, therefore, in the same situation that it was in before the proposal was published; if EPA offers indemnification it must set a limit and a deductible for the indemnification even though little factual data exists on which to base them, or even to determine whether indemnification is needed. The approach that EPA has decided to take in the final guidelines draws from the first three alternatives outlined in the 1989 FR notice: Provide no indemnification; Provide indemnification subject to statutory requirements; Offer indemnification with market incentives to purchase commercial insurance. The goal of these guidelines is to ensure that an adequate pool of qualified RACs is willing to work at Superfund sites. This goal must be balanced with EPA's responsibility to protect the financial exposure of the government so that Superfund monies may be used to clean up the maximum number of waste sites. EPA's authority to provide indemnification to RACs for negligent actions is discretionary and is a temporary vehicle. EPA's indemnification authority will only be used to the extent adequate commercial liability insurance is not available. General Approach Prime Contracts For future contracts (or contracts with other agencies or local governments having an inter-agency agreement or cooperative agreement with EPA to clean up Superfund sites), EPA will offer indemnification only if there is a lack of adequate competition for a solicitation due to the absence of indemnification. If this is the case, EPA will offer a new or amended solicitation, and the selected RAC will be eligible for indemnification under these guidelines. For RACs with fixed-price contracts, EPA proposed in 1989 to use market incentives to encourage RACs not to request indemnification. Under the proposal, RACs would be permitted to determine whether they wanted EPA indemnification and the amount, but their bid would be adjusted higher to reflect the indemnification request. After further consideration, EPA has concluded the proposed adjustment procedure would be unworkable and present considerable obstacles for EPA. EPA decided that, as with new cost-reimbursement RACs, the solicitation process will be used to determine if RACs will work without indemnification. If EPA offers indemnification to RACs, it still maintains that the RAC is in the best position to know the coverage that it needs. However, to compensate for a RAC's tendency to overstate its needs, EPA will tie the size of the limit with the size of the deductible. These RACs will be able to choose from a range of limits (and associated deductibles) for the coverage that best meets their needs. The deductible associated with the limit increases as the coverage increases, similar to the scale presented in the 1989 proposal. For the highest level of coverage available for long duration (longer than five years) cost-reimbursement contracts, the RAC must make dollar-for-dollar co-payments for coverage above a certain level. Under this proposal, a RAC will not overstate its needed coverage, and the RAC will retain increasing financial responsibility for smaller claims in proportion to the coverage that it seeks from EPA. EPA believes that the guidelines will promote the development of a private insurance market and encourage RACs to seek alternative coverage from the private sector and permit the private sector to grow absent the need to compete with generous coverage from the federal government. As the RAC community turns to the private sector for coverage, its ability to provide desired products should increase. EPA believes that it would be in the government's best interest to have the least disruption to the clean-up effort. EPA will negotiate with its RACs to replace their indemnification coverage under the interim guidance with coverage under these guidelines and thereby avoid the need to terminate current contracts. Therefore, EPA will offer modified indemnification agreements with limits and deductibles to RACs and their subcontractors that currently have contracts to perform Superfund work. Since a RAC operating under a current contract will not have to compete in the open market to receive indemnification, EPA cannot use a competitive test to determine if this RAC would work at particular sites without indemnification. Subcontractors EPA has tried to address the issue of subcontractor indemnification where the use of subcontractors meets special EPA objectives, such as the use of small and disadvantaged businesses or innovative technologies. In contracts of {pg 5975} long duration (greater than five years), which currently are only the Alternative Remedial Contracting Strategy (ARCS) contracts (regional ten-year contracts for the planning and clean up of CERCLA sites), the prime contractor will have $15 million (above its own indemnification limit) available to flow down to subcontractors in the subcontracting pool. This pool is generally where small and small and disadvantaged businesses have an opportunity to be involved in Superfund contracting. EPA will also permit RACs, whether they are prime or subcontractors, who provide innovative technologies under a contract to provide remedial action (RA) construction services to obtain indemnification with smaller deductibles than are available to other contractors. Subcontractors performing remediation work for a cost-reimbursement prime may be eligible to receive additional indemnification for that work. When EPA issues work assignments to prime cost-reimbursement contractors to implement remedial action (RA), the prime contractor is required to initiate the RA through a subcontract (rather than EPA issuing its own solicitation for the work). Under the guidelines, the subcontractor awarded the RA work may be eligible to receive, through the prime contractor, indemnification at the same level of indemnification as contractors hired directly by EPA. However, EPA will require its prime cost-reimbursement contractors to follow the same solicitation procedures as followed by EPA when hiring contractors directly. That is, the prime contractor's original solicitation must not offer indemnification. If there is not an adequate response to the solicitation because of the lack of indemnification, the subcontractors which respond to a new or amended solicitation will be eligible to receive indemnification through the prime contractor. To receive indemnification, the subcontractor must meet all the requirements of these guidelines, including the diligent efforts requirements. Length of Coverage The length of coverage was another area where EPA received a great deal of comment. EPA proposed that it was considering a period of coverage of ten years. Many commenters stated that ten years was too short a period and suggested that EPA adopt a thirty- year period. EPA did consider these requests, but concluded that commenters that argued for a greater length of coverage did not justify a longer term. EPA retained the ten-year period as balance between the need to provide coverage to retain a qualified pool of RACs to work at EPA sites and EPA's responsibility to limit the exposure of the Superfund. A. Executive Order 12291 Under Executive Order No. 12291, EPA must determine whether a rule is "major" and thus subject to the requirement of a Regulatory Impact analysis. The notice published today is not major because the proposed guidelines will not result in an effect on the economy of $100 million or more, will not have significant adverse effects on competition, employment, investment, productivity and innovation and will not significantly disrupt domestic or export markets. Therefore, EPA has not prepared a Regulatory Impact Analysis under the Executive Order. The proposed guidelines were submitted to the Office of Management and Budget as required by Executive Order No. 12291. B. Regulatory Flexibility Act Whenever an agency is required by law to publish a general notice of proposed rulemaking, the Regulatory Flexibility Act of 1980, 5 U.S.C. 601-612, generally requires that the agency prepare a Regulatory Flexibility Analysis (RFA) describing the impact of the proposed rule on small entities. Because EPA was not required to publish the guidelines as a notice of proposed rulemaking under Sec. 553 of the Administrative Procedure Act (5 U.S.C. 553) or any other law, they are not subject to the RFA requirements of the Regulatory Flexibility Act. C. Paperwork Reduction Act The information collection requirements in these guidelines have been submitted to the Office of Management and Budget (OMB) for approval under the Paperwork Reduction Act of 1980, 44 U.S.C. 3501 et seq. These requirements are not effective until OMB approves them, and a technical amendment to that effect is published in the Federal Register. An Information Collection Request document has been prepared by EPA (ICR No. 1595.01) and a copy may be obtained from, Chief, Information Policy Branch (PM-223); U.S. Environmental Protection Agency; 401 M St., SW.; Washington, DC 20460 or by calling (202) 382-2706. Public reporting burden for this collection of information is estimated to be 132 hours per response, including time for review of the instructions, searching existing data sources, gathering and maintaining the data needed, and completing and reviewing the collection of information. Send comments regarding the burden estimate or any other aspect of the collection of information, including suggestions for reducing this burden to, Chief, Information Policy Branch, PM-223, U.S. Environmental Protection Agency; 401 M St., SW.; Washington, DC 20460; and to the Office of Information and Regulatory Affairs, Office of Management and Budget, Washington, DC 20503 marked: "Attention Desk Officer for EPA." II. Response to Major Public Comment Indemnification Limits and Deductibles for Cost- Reimbursement Contracts Comment: In its proposed guidelines, EPA presented a sliding scale of limits and deductibles that would allow the RACs to choose the indemnification coverage that they felt met their firms" needs. Under this scale, the higher the limit the RAC chose, the higher the associated deductible would be. At the top end of the scale, a RAC could select a maximum of $50 million of indemnification coverage with an associated deductible of $3.5 million. EPA received the most comments on this aspect of the proposal. Many commenters stated that the $50 million limit was inadequate to cover what many commenters believe is the inherent risk of working at Superfund sites and the exposure of a catastrophic event which could bankrupt many companies. Commenters stated that if a RAC is forced into bankruptcy by a claim greater than its indemnification limit, the public may be left uncompensated for damages that may have occurred due to the clean-up action. Commenters suggested $100 million to $300 million in limits or full indemnification without limits, although there were some comments that no indemnification should be offered. No commenters gave a factual basis for their suggested limits, although many cited an EPA sponsored document that they claim recommended a limit of $200 million. In addition, some commenters noted that the limit was especially inadequate for multiple site contracts of long duration with numerous subcontractors seeking a share of the indemnification. They stated that if the limits were not raised prime contractors would choose not to share the limited indemnification with subcontractors and possibly choose not to work at Superfund sites. Commenters also overwhelmingly spoke against the deductibles as being too high. Under the proposal, there would not be a contract aggregate limit {pg 5976} to the RAC's deductible. That is, the RAC would be required to pay the deductible amount each time a claim is made, regardless of the number of claims. Most commenters believed that this represented too great a burden on RACs given the profit margins on contracts to perform response actions. Commenters stated that even if a firm chose to purchase insurance from the private sector to cover the deductible, it would be too costly and would provide limited coverage due to policy exclusions. Many commenters stated that EPA should reimburse RACs for the cost of insurance if a RAC did purchase a policy to cover the deductible. In addition, commenters stated that to have the indemnification limit on a contract aggregate basis but to have the deductible on an "occurrence basis" (no contract aggregate limit) would lead to unlimited liability for the RACs and would be inconsistent with insurance policies in the private sector. Commenters stated that the deductibles were especially high for small businesses, grantees training hazardous waste workers, and innovative technology RACs. Commenters did agree with the concept of a sliding scale in that it would permit RACs to choose a deductible and limit that met their particular needs. Some commenters thought, however, that the deductibles should be reflective of the contract value, and, therefore, the profit margin of the contract. They suggested that the deductible should be limited to a percentage (1% to 3%) of the contract value. Response: Based on the comments and EPA's current knowledge, it believes that its basic approach of paired limits and deductibles chosen by the RAC is still appropriate. EPA's indemnification agreements must have limits and deductibles because of the statutory requirements to do so. EPA proposed the sliding scale of limits and deductibles based on the concept that the RAC could best determine its required indemnification coverage. EPA included higher limits to provide coverage to RACs that believed such coverage would be necessary. EPA believed that a RAC requesting a high limit should be responsible for small claims so that it assumes some financial responsibility for its negligent actions, and, therefore, paired a higher limit with a higher deductible. Also, EPA believed that the deductibles should stand as a disincentive to the RAC to prevent it from overstating its indemnification needs, and as an incentive to maintain proper performance. As supported by the comments, EPA continues to believe that it may be appropriate to offer indemnification in some cases. However, as some commenters have noted, the fact that some RACs are willing to work for others, including other federal agencies, and at some EPA Superfund sites without indemnification is persuasive that offering indemnification may not be necessary in all cases. EPA has decided the best way to determine when indemnification is needed is to attempt to obtain contractors without offers of indemnification and to offer indemnification only when a solicitation has not attracted an adequate number of qualified offerors/bidders because of the absence of indemnification. Therefore, for future contracts, EPA will offer indemnification only if there is a lack of adequate competition to a solicitation due to the absence of indemnification. If this is the case, EPA may issue a new or amended solicitation, and the RAC will be eligible for indemnification once it has met the criteria (including diligent efforts) outlined in the guidelines. EPA believes that this approach will use the market place to determine when it is necessary for EPA to use its discretionary authority to offer indemnification. In this manner, EPA will maintain its fiduciary responsibility to ensure that Superfund moneys are used to the maximum extent possible to clean up sites, and at the same time maintain an adequate number of contractors willing to work at EPA sites. Many RACs have argued that other contractor situations are not analogous to performing response work at EPA sites. At many of the sites where EPA is funding work, there are no viable owners or operators with whom contractors can, by contract or otherwise, seek to share liability. At many, if not most, private or federal facilities, this possibility for risk transfer (or sharing) exists. EPA does not take a position on this distinction. Regardless of the distinction, EPA maintains that the Congressional intent of providing EPA with the discretionary authority to offer RACs indemnification against negligence was only to ensure that an adequate number of qualified RACs are willing to participate in the Superfund program. To follow a policy that tests the RAC community's willingness to participate without indemnification through future solicitations is the best method to determine the number of qualified RACs willing to participate in the Superfund program without indemnification. Although the "market- test" approach is reasonable to use for future contracts, it is not appropriate for use for current contracts that will need to be modified to be consistent with the final guidelines. Since a RAC operating under a current contract will not have to compete in the open market to receive indemnification, EPA cannot use a competitive test to determine if this RAC would work at particular sites without indemnification. Further, EPA believes that it would be in the government's best interest to have the least disruption to the cleanup effort. Therefore, EPA will negotiate with its RACs to replace their indemnification coverage under the interim guidance with coverage under these guidelines and thereby avoid the need to terminate current contracts for Superfund work. With respect to indemnification limits, EPA is persuaded by many commenters" concerns that a limit higher than the $50 million in the proposal is needed, in some cases, to attract or keep RACs at Superfund sites. That is, many RACs have indicated to EPA that RACs may desire greater coverage in exchange for greater deductibles. EPA believes that these higher limits would be needed primarily to cover a possible catastrophic event. EPA believes that without adequate limits, the number of qualified contractors willing to do work for EPA might be unacceptably reduced, and that those willing to perform the work would raise their prices for EPA work due to a lack of adequate competition. At the same time, EPA must be cognizant of its own ability to absorb claims. Although commenters did not provide support for specific limits above the $50 million proposed by EPA, EPA is persuaded that RACs with current multiple-site contracts of long duration (longer than five years) with numerous subcontracts, which are generally ARCS contracts, may need limits higher than $50 million. EPA believes that higher limits may be needed for these contracts of long duration because: ARCS contracts (regional contracts for the planning and cleanup of CERCLA sites) have a ten- year term, more than double the duration of other Superfund contracts. ARCS work assignments will be of a complex nature with assignments ranging from remedial investigation/feasibility study (RI/FS), the investigation and planning phase, to managing remedial construction. ARCS contracts have, on average, two or three team subcontractors, i.e., subcontractors named in the contract that remain as part of the cleanup effort {pg 5977} for the life of the contract. Therefore, under one ARCS contract there are subcontractors with whom RACs may need to share their indemnification. The ARCS contractors will need higher limits to be able to share the indemnification with these subcontractors. ARCS contractors cannot identify in advance the sites at which they will work over a ten-year period as a RAC with a site-specific contract who can adjust its bid to reflect the perceived risk. Under the ARCS contracts, sites are assigned by EPA. While it is true that Emergency Response Cleanup Services (ERCS) and Technical Assistance Team (TAT) contractors must also accept work as EPA assigns it, their assignments are generally less complex and shorter in duration, such as surface spill clean up. Much of the ARCS contractor's work is below ground activity which adds to the complexity of the work and to the unknown aspects of the job. ARCS contractors will need to subcontract with numerous specialty contractors, whose specific activities have a higher potential for increasing the risk of potential liability for releases. This is additional exposure that other RACs that have contracts of shorter duration, fewer sites, and more above ground work will not have. RACs doing the remedial action (construction) are performing a very complex portion of the Superfund program, and one which may be the most likely to cause releases of contaminants. EPA concludes that some underwriters in the private sector agree since some insurance policies presented to EPA will cover multiple sites and multiple activities but not the RA work. For RA work, some underwriters in the private sector have provided only site-specific policies. Several comments urged adoption of a $200 million indemnification limit which was recommended by Tillinghast, Nelson, and Warrenby, a consulting firm engaged by EPA to research liability issues. The firm's recommendation, which was made in a letter dated August 7, 1987, was prefaced with a caveat that "there is no credible data available for use in setting deductibles and limit levels." In its final guidelines, EPA is providing a $75 million per occurrence/contract aggregate limit for existing cost-reimbursement contracts of long duration (longer than five years), such as ARCS contracts. EPA believes that this limit will provide adequate coverage to contractors. The associated deductible is $2 million, and the RAC must make dollar-for-dollar co-payments above $50 million for a maximum coverage up to $75 million. EPA believes that in return for increased coverage, the RAC must assume financial responsibility for some portion of the claim. That is, EPA will permit a RAC to choose a higher limit to protect itself from a catastrophic claim, but in so doing the RAC must assume the financial responsibility for smaller claims. In this manner, RACs will share the risk with EPA. EPA believes that the RACs are generally able to purchase adequate insurance coverage from the private sector to cover the deductible (not the co-payment portion), if they choose. EPA has introduced a three-tiered system that will govern the upper limit of coverage that a RAC may choose based on the dollar value of the contract at the time of award. RACs will be permitted to choose the limit and associated deductibles based on their own needs, but the upper limit of that choice will be controlled by the dollar amount (size) of their contract. EPA believes that contracts with work assignments for few sites or with smaller dollar values hold less risk and potential exposure to liability than do larger contracts, therefore, these RACs will be limited in the choice that they may make. Conversely, RACs with larger contracts will be permitted to choose higher limits. (Small and large are defined in the three-tiered system.) EPA did not add a contract aggregate to the deductible as some commenters suggested. An aggregate deductible would only benefit those RACs who are the subject of negligence lawsuits on multiple occasions. Further, by removing the financial incentive for a RAC to act non-negligently, use of an aggregate deductible might increase the probability that negligent behavior would occur. EPA disagrees with commenters who stated that per occurrence deductibles are inconsistent with insurance policies provided in the private sector. All policies that EPA has received from its RACs for review have stated that the self- retention or deductibles have been on a per claim basis ( e.g., per occurrence basis). The limits offered have always been stated as per occurrence/per aggregate. The guidelines do not attempt to provide total indemnification to RACs. EPA has used the deductible and copayments as a mechanism by which RACs will accept the initial financial responsibility and higher range financial responsibility for catastrophic coverage for any negligent actions that result in a release of any hazardous substance or pollutant or contaminant. The following considerations were the basis for the final deductible and co-payment requirements: The deductibles are generally tied to the profit margin in the contracts. Sound business practices would prevent RACs from bidding on work at EPA sites where the RAC would be exposed to a deductible that is bigger than the profit it could make from the work. EPA's deductibles are not required to mirror commercial insurance practices. The federal government has broader goals, social and economic, from the private sector. EPA's primary goal is to have an adequate number of qualified RACs participating in the Superfund program. The RACs requested higher limits for catastrophic claims. However, by its very nature, a catastrophic event caused by a negligent action is quite serious. EPA believes that companies needing this coverage at a very high range are generally large firms with substantial resources to protect. Therefore, these companies should be able to bear the financial responsibility of their negligent actions at the higher range by matching payments with EPA at the $50 million to $75 million range. Finally, in response to commenters" concerns that higher deductibles could lead, in cases where the RAC could not meet its financial responsibilities, to situations where successful third- party suits would not receive proper compensation, EPA has stated its goals and the rationale for the size of its deductibles. Victim compensation is not a goal of the Sec. 119 indemnification program. EPA's primary responsibility is to protect the exposure of the Superfund so that it can be used to the maximum extent possible to clean up hazardous sites. EPA believes that the approach taken in the final guidelines will satisfy that goal and encourage non- negligent behavior by its contractors. Moreover, RACs may purchase insurance in the private sector to cover the deductible in their Sec. 119 indemnification agreements. Fixed-Price (Sealed Bid) Contracts Comments: In 1989, EPA proposed to indemnify RACs with fixed-price (sealed bid) contracts by placing an explicit price on its indemnification and adding it to a RAC's bid for a fixed-price contract. Commenters responded that the proposal did not provide the methodology for EPA's determination of a fair price for indemnification, and questioned EPA's ability to use underwriting criteria to determine the value of its indemnification as stated in the proposal. Commenters also stated that the proposed scheme conflicts with federal procurement law. {pg 5978} Response: EPA has considered the obstacles to adjusting a sealed bid, and after further consideration, EPA believes that it should change its position. Instead, EPA will use the same approach for fixed-price contracts as stated for cost-reimbursement contracts. That is, EPA will not offer indemnification unless there is an inadequate response to a solicitation and the lack of response can be linked to the absence of indemnification. The guidelines for fixed-price contracts, when indemnification is offered, are designed to permit the RAC to determine its indemnification requirements, and to provide strong incentives for a RAC not to overstate its indemnification needs. EPA has adopted in the final guidelines the same set of limits and associated deductibles as for cost- reimbursement contracts. This approach ties the amount of the indemnification to the contract value and, therefore, roughly to the scope of the work and the RAC's profit margin. EPA believes that this approach is consistent with sound business decisions RACs make in choosing whether to work at EPA sites. Term Comments: The majority of commenters responding to EPA's proposed period of coverage for the indemnification stated that ten years beyond the contract term was too short. Although there is no substantial claims history, they contended it might well take years before a release is known, and therefore, a claim is made. Commenters also noted that the regulations for the Resource Conservation and Recovery Act (RCRA) require owner/operators to monitor RCRA sites for thirty years after site closure. These commenters suggested a period of coverage from twenty years to perpetuity. One commenter stated that ten years was too long a period for the indemnification coverage. The commenter cited the private sector insurance policies that require annual renewals and only provide a few years additional coverage for additional premiums. Response: As with the limits and deductibles, EPA proposed a ten year period, requesting comments and supporting rationale with the comments. EPA acknowledges that the lack of historical data for the Superfund program can be cited to either support or oppose a proposal to extend the period of coverage beyond ten years. EPA does not believe that a comparison to the RCRA requirement to monitor sites for thirty years is valid. In the case of the RCRA requirement, the decision to require monitoring for thirty years was based on the economic burden of monitoring to the owner/operator. Conversely, EPA is not convinced by the argument that since current insurance policies are of short duration, EPA's indemnification should also be of short duration. EPA believes that insurance companies are offering policies of short duration to limit their exposure. Part of EPA's statutory mandate is to attempt to encourage the insurance industry to increase its current insurance coverage so that EPA's indemnification will not be necessary. EPA's action to extend coverage to ten years may encourage the private sector to increase its period of coverage. EPA is also attempting to fill in the gaps in coverage that the insurance industry currently does not address. Commenters argued that the length or term of EPA's indemnification should extend beyond ten years based on the RAC's perceived need for long-term coverage. In cases where EPA will offer indemnification, it will be done because EPA believes that absent indemnification RACs will not work at Superfund sites. When offering indemnification, EPA must be very mindful of the potential liability it assumes for the RAC's negligence. After careful consideration, EPA believes that any period beyond ten years would be an unreasonable burden to the Trust Fund and possibly to the U.S. Treasury. EPA is not willing to assume such liability without market-based data that RACs will not work at Superfund sites without an indemnification agreement with a term greater than ten years. RAC Liability Comments: Many commenters discussed the RAC's liability and stated that EPA's proposal would place an unfair burden on the RAC. Most of these comments focused on discussions of strict liability and stated that EPA's indemnification should be expanded to include coverage for strict liability. Commenters requested that the language of paragraph 8(c) in the 1989 proposal, which states that EPA indemnification will not apply if a RAC is found to be both negligent and strictly liable and the cause of action is not divisible, be changed. Commenters believed that EPA's indemnification should apply in this case. Commenters did not cite any language in the statute that they believed authorized indemnification against strict liability. Other commenters questioned paragraph 8(a) of the proposal, which states EPA will indemnify RACs against third-party liability. The commenters asked whether this could mean that EPA's indemnification will not cover possible CERCLA liability. Other commenters pointed out that state statutes vary and asked that the final guidelines be written to pre- empt state statutes and indemnify RACs against state liabilities. Response: CERCLA Section 119 gives EPA the discretionary authority to indemnify RACs against negligence only. Congress did not authorize EPA to indemnify RACs for any liability associated with gross negligence, intentional misconduct or standard of strict liability nor to pre-empt liability under state law. EPA is indemnifying RACs under section 119 against third-party liability arising from releases caused by their negligence. Section 119 waives CERCLA liability unless the RAC was negligent, grossly negligent, or engaged in intentional misconduct. Other Federal Agencies Comments: EPA received comments to delete paragraph 16(a) of the proposal which states in part "that if other federal agencies choose to indemnify their RACs under CERCLA authority, then that indemnification must not be inconsistent with these guidelines." Commenters stated that if these guidelines become regulations they would unnecessarily bind other federal agencies and create unintended rights for RACs. Some commenters stated that CERCLA section 120(a), which generally requires other federal agencies" actions to be consistent with CERCLA, was written to address the technical aspects of remediation only. One commenter asked that EPA clarify whether section 119 indemnification authority could be used by other federal agencies at non-NPL sites. Response: EPA has not deleted this language. CERCLA section 119(c)(7) directs the President to develop guidelines and regulations for carrying out the indemnification provisions of CERCLA section 119. The President delegated this authority to EPA in Executive Order 12580 (Jan. 23, 1987), sections 2(b) and 11(g), 52 FR 2923, 2924, and 2929 (Jan. 29, 1987). The President tasked EPA with promulgating CERCLA section 119 guidelines and regulations, and specified that this authority was "to be exercised in consultation with the NRT." The NRT (National Response Team) is an interagency organization, established by section 1 of the Executive Order, which consists of representatives from EPA and other federal agencies and departments. {pg 5979} The Executive Order contains limited delegations of CERCLA section 119 authority to other federal agencies and departments. Their delegated authority is limited "to releases or threatened releasesfrom any facility or vessel under the ir jurisdiction, custody, or control." E.O. 12580, sections 2(d) and 2(e)(2). The CERCLA section 119 authority delegated to the other agencies and departments is "subject to," among others, the Executive Order provision delegating CERCLA section 119(c)(7) authority (to issue indemnification guidelines and regulations) to EPA. Read together, the exclusive delegation of CERCLA section 119(c)(7) authority to EPA and the limited delegations of section 119 authority to other agencies and departments indicate that the EPA indemnification guidelines are being issued on behalf of the President, and are to be followed by all federal agencies and departments when providing CERCLA section 119 indemnification. EPA also believes that interpreting E.O. 12580 to require that federal agencies and departments follow the indemnification guidelines when providing CERCLA section 119 indemnification is consistent with CERCLA section 120. EPA interprets the phrase "must not be inconsistent" to mean that other federal agencies and departments must comply with the general terms and conditions set forth in these guidelines when providing CERCLA section 119 indemnification. For example, an effort must be made to get contractors to work with-out indemnification before indemnification offers under CERCLA section 119 authority can be made. The indemnification agreements may contain numerical values which differ from those in these guidelines. Such numerical differences, if justified for a particular agency or response action contract, would not make the other agency's indemnification agreement inconsistent with these guidelines. With regard to the use of section 119 authority by other federal agencies or departments at non-NPL sites, section 119(c)(1), as implemented by E.O. 12580, authorizes federal agencies and departments to agree to indemnify "any response action contractor" meeting certain specified requirements. Section 119(e)(2) generally defines a "response action contractor" as any person who enters into a response action contract and any person hired to perform response work under such a contract. A "response action contract" is defined, in pertinent part, as a written contract or agreement "to provide any remedial action under this chapter i.e., under CERCLA at a facility on the National Priorities List". Section 119(e)(i). Thus, the statute provides no authority for the indemnification of contractors under CERCLA section 119 performing remedial action work at sites which are not on the National Priorities List. Diligent Efforts Comments: EPA received many comments addressing the diligent efforts requirements. In the proposal, EPA stated that a RAC must submit the names and addresses of at least three commercial insurers or alternative risk financiers to whom it has submitted applications. Also, RACS must submit copies of their applications, insurance policies offered, rejection letters, and other correspondence between the RAC and the underwriter. All commenters stressed the burden that this requirement places on the RACs and particularly small-business RACs. Commenters offered suggestions on how they believed this burden could be lessened. These included exempting RACs from the diligent efforts requirement, restricting the schedule for making diligent efforts, or having EPA survey the market and thus perform the diligent efforts. Some commenters focused on the requirement that RACs must prove that applications have been submitted to three insurance underwriters. Finally, other commenters asked for clarification of when and how EPA would review the RACs" diligent efforts. Response: EPA recognizes that the diligent efforts requirement may be somewhat burdensome to RACs. However, CERCLA section 119 clearly requires RACs to make diligent efforts to obtain private insurance coverage in order to be eligible for indemnification. RACs with multiple-site contracts are specifically required to continue to make diligent efforts each time a RAC begins work at a new site. EPA has no authority to relieve RACs of these statutory requirements. EPA does not believe that surveying the market would alleviate the RACs" burden. RACs, through the conduct of normal business, certainly know which insurance underwriters are offering pollution liability insurance. Most RACs have insurance brokers that perform this service for them. EPA is unable to perform diligent efforts for RACs because the statute requires the RACs to make their own diligent efforts. In any event, for EPA to begin this activity would be contrary to the Congressional intent that EPA limit its involvement in the insurance industry. By entering this area, EPA might be seen as endorsing one underwriter over another, or stifling another firm's entrance into this market. EPA has tried to lessen the burden by modifying the proposed requirement that RACs seeking indemnification make applications to three underwriters, since at times there have not been three underwriters able to provide a RAC with its desired coverage. EPA has also added the opportunity for a RAC to use the actions and experience of its broker to satisfy the diligent efforts requirement. EPA believes this is a logical approach because most RACs use the services of a broker, and it will be easier for the RAC to submit the broker's work than applications that may be unnecessary in some circumstances. Also, the RAC may submit a statement from the broker that insurance is unavailable and the rationale for its unavailability. EPA will review the diligent efforts of its prime contractors. Based on this review and additional instructional material from EPA, the prime will be required to review the diligent efforts of its subcontractors. EPA lacks privity of contract with subcontractors and is not directly indemnifying the subcontractors. It is, therefore, the prime's responsibility to review in the first instance its subcontractors" diligent efforts. Indemnifying Equipment Suppliers Comment: EPA received a late comment from a supplier of incinerator equipment requesting clarification as to whether equipment providers who are not prime contractors to EPA are RACs and, if so, whether these suppliers would receive indemnification on the same basis as service providers. As to the first question, the commenter noted that the statutory definition of response action contract clearly covers contracts for the provision of equipment under prime contracts, that is, contracts entered into directly with the government (or a PRP). The statutory definition of a RAC does include subcontractors but only those "retained or hiredto provide services," which may not include equipment providers. The commenter also noted that the definitions of "RAC" and "response action contract" in the proposed guidelines do not precisely follow the statutory definitions. Specifically, the definition of RAC in the proposal is "any person who enters into a response action contract to provide services and any person hired or retained by such person." By restricting the modifier phrase "to provide services" to prime contractors, the commenter argued that equipment providers would be RACs if they are {pg 5980} retained by prime contractors providing services. Response: EPA did not intend to define RAC so as to indemnify equipment providers, as opposed to service providers. The definition of RAC in the proposed guidelines was intended to convey this. The interpretation provided by the commenter was not intended by EPA, and the definition in the final guidelines is being modified to clarify that only service providers, whether prime contractors or subcontractors, are to be eligible for indemnification. The commenter argued that providers of equipment to a Superfund site are in danger of being involved in a toxic tort action of major financial proportions without any present hope of protection from insurance, which invariably excludes protection against pollution-related claims or that provides limited coverage at a high cost. EPA, however, has not found that it is necessary to offer indemnification to obtain equipment and does not anticipate the need to do so in the future. EPA will continue to monitor this issue, however. In addition to the clarification to the definition of RAC noted above, EPA is also clarifying that service providers include persons performing construction. This clarification is being made because in some instances, such as in the FAR, service contracts do not include construction contracts. Construction is commonly considered to be a service, and EPA intended in the proposal to use "service" in this broader sense. Legal Defense Costs Comments: In the proposal, EPA stated that expenses of litigation would be subject to all the terms and conditions of EPA indemnification, including the negligence standard and the applicable deductible. Commenters addressed many aspects of legal defense and its costs. Several commenters stated that defense costs should be fully reimbursed (i.e., not subject to a deductible) if the RAC is found free of negligence. Other commenters asked if EPA would pay litigation expenses as the costs are incurred. A few comments suggested that EPA should assume a duty to defend RACs and include such a provision in the guidelines since private sector insurance policies contain this provision. Response: EPA indemnification is not intended to offer total protection to RACs from their negligent acts at Superfund sites. The choice of limits and associated deductibles will permit a RAC to choose a lower deductible if it wishes to have more of its potential legal defense costs subject to indemnification coverage. EPA will not use the standard language of insurance policies which asserts that the insurance company maintains the right but not the duty to defend the insured in case of a claim. EPA's indemnification clause states: "The Government may direct, control, or assist the settlement or defense of any such claim or action." This language is consistent with the legislative history of CERCLA section 119, which makes clear that the government generally should not directly defend RACs against claims that are subject to indemnification. Notification of Claims Comments: Some commenters suggested changes to the language of paragraph 8(d)(i) of the proposal which defines "prompt" action as action within twenty days of the date when the RAC knew or should have known of the claim or event. Commenters stated that twenty days was too short a period for claim reports to pass from subcontractors to the prime contractor and through the prime's corporate offices to EPA. Commenters also stated that some of the language in the paragraph was ambiguous, such as the phrase "should have known," and sought clarification on use of the terms "claim" and "event." Most commenters recommended that EPA adopt the language found in private insurance policies. Response: EPA is not persuaded by the commenters" argument that twenty days is too short a period for reporting a claim or that the provision contains ambiguous language. EPA does, however, believe that clarification is needed with regard to the notification period. EPA has defined the period as twenty working-days. This means that a prime would have twenty working-days to notify EPA after a subcontractor has notified it of a claim or action. The subcontractor in this example would have twenty working- days to notify the prime contractor. Retroactivity Comments: The proposal stated that the terms and conditions of the final guidelines "will be applicable retroactively to the date of enactment of SARA, or to the starting date of the contract, whichever is later." Commenters suggested that EPA reconsider the retroactive application of these guidelines. They argued that RACs indemnified under the interim guidance (OSWER Directive 9835.5) should be permitted to remain subject to that guidance. Commenters stated that there would be no incentive for RACs to agree to switch to coverage under the final guidelines. Response: EPA has considered these comments but cannot agree to change its approach as suggested. EPA's intent all along, as indicated by the term "interim," has been to formulate final guidelines that would be the basis for modification of the indemnification provisions in current contracts. The Agency intended to do so in its capacity as steward of the Trust Fund since the interim guidance contains a small deductible and no specific limit on coverage. RACs that have received EPA indemnification have in their agreements a clause that confers indemnification and states in part that, "This clausewill be modified by the mutual agreement of the parties hereto within 180 days of the EPA's promulgation of final guidelines for carrying out the provisions of Sec. 119." In addition, EPA has corresponded with its RACs to affirm this position and has stated that RACs that refuse to agree to modify their agreements will not receive additional work under that contract. Given the obvious temporary nature of EPA indemnification under the interim guidance, EPA believes that RACs understood that this protection lacked permanence and was on a "claims made" basis. Therefore, if RACs do not accept modification of their existing contracts to conform to the final guidelines, the contracts will be terminated, and EPA's potential liability under the interim guidance effectively will cease as of the date of contract termination. Surety Issues Comments: Many commenters stated that EPA indemnification must be extended to surety firms. Commenters stated that surety firms would not provide bonds for RACs without a clear sense of the potential risks to which the firm would be exposed. Commenters stated that if a surety did receive indemnification these uncertainties would be alleviated. Commenters stated that EPA indemnification would protect sureties from liability under a bond that it never intended to cover. Response: In November 1990, the President signed into law an amendment to section 119 (Pub. L. 101-584) that is designed to give sureties whose bonds are activated the same protection from federal liability and access to indemnification that their RACs have under section 119. Consistent with the purpose of the amendment, EPA's final guidelines extend a RAC's indemnification {pg 5981} coverage to its surety if the performance bond is activated. EPA is limiting its indemnification to firms that provide performance bonds because it believes that firms that provide bid or payment bonds are not at risk for a RAC's negligence. If a performance bond is activated, the surety will stand in the shoes of the defaulted RAC and inherit its indemnification coverage. EPA believes that since the surety, at most, is responsible for completing a RAC's work (as opposed to initiating a new job), it will not be exposed to any additional liability. Indemnification of Subcontractors Comments: The proposal stated that the prime contractor would pick the limit and deductible best suited for its needs. Commenters stated that even at the maximum limit offered of $50 million, the prime contractor would retain all of the coverage for itself due to greater perceived potential liability. Almost all of the commenters addressing indemnity of subcontractors said that the proposed guidelines would discourage prime contractors from extending indemnification to subcontractors with consequent impacts upon the small business contractor community. The commenters suggested that for subcontractors to receive indemnification, EPA should indemnify them directly. Response: EPA agrees that some contractors may be reluctant to share their indemnification with their subcontractors. However, EPA does not believe that the solution is to indemnify subcontractors directly. EPA does not have a direct contractual relationship with subcontractors, and lacks privity of contract with them. Moreover, the subcontractor approval requirement in section 119(c)(5)(E) confirms that Congress did not intend for EPA to establish a contractual relationship with subcontractors through direct indemnification. Therefore, EPA believes it is inappropriate for EPA to directly indemnify subcontractors. EPA has, however, addressed the concerns about impacts on small businesses in two ways in the final guidelines. First, it has raised the indemnification limit for existing cost-reimbursement contracts that prime contractors may choose for multiple-site contracts of long duration (longer than five years). With a higher limit, the prime contractor may be more willing to extend its indemnification to subcontractors. Also, EPA will permit those prime contractors to flowdown up to $15 million to some subcontractors in the subcontracting pool; this limit does not affect the primes" limit. This provision will help ensure that prime contractors offer indemnification to protect small businesses with relatively little resources. No one subcontractor may receive more than $5 million coverage. EPA will publish a list of subcontracting services for which it will permit prime contractors to extend this indemnification, but generally the activities eligible for indemnification will be confined to intrusive services performed at the site in the contaminated area. Indemnification of Innovative Technology RACs and SITE Participants Comments: In the proposal, EPA stated that technology vendors in the Superfund Innovative Technology Evaluation (SITE) program are considered RACs, and further stated if EPA did offer these RACs indemnification, it would be under the same terms and conditions as cost-reimbursement RACs. Commenters stated that EPA was overlooking the value that these RACs add to the Superfund program and pointed out that SARA states a preference for innovative technology in the remedy selection. Commenters felt that most aspects of the indemnification agreements available to RACs with cost-reimbursement contracts were inappropriate for these RACs and might prohibit their entrance into the Superfund program. They stated that the deductibles were too high since many of these RACs are small in size. Some commenters stated that the limits might be beyond their needs. Response: EPA agrees that these RACs add value to the Superfund program, and that their needs may be different from RACs with cost-reimbursement prime contracts. For example, in addition to the difference in perceived risks posed by the activities of these companies, EPA believes that they are often smaller companies than those that are awarded cost-reimbursement contracts with EPA. As such, they may have difficulty meeting the deductibles set for RACs with cost-reimbursement prime contracts. EPA has tried to address this difference by providing different limits and associated deductibles for both SITE participants and for RACs with innovative technologies. In each case, these RACs will be permitted to choose a limit with an associated deductible based on their particular needs. Where these RACs require higher limits to protect their assets, EPA believes that these companies are in a better position to afford deductibles set for RACs with cost- reimbursement prime contracts. Therefore, the difference between the deductibles available to SITE participants and innovative technology RACs and prime cost-reimbursement RACs for the same limits narrows as the $25 million limit is reached. EPA has restricted the upper limit of coverage for RACs with innovative technologies that are subcontractors and SITE participants to $25 million because it believes their work is of a smaller scope than RACs with prime contracts. EPA will permit RACs with innovative technologies that are prime contractors to also choose limits with lower deductibles up to $25 million to encourage their participation in the Superfund program. These RACs may elect to choose higher coverage than $25 million, but they will not receive the benefits of deductibles that are lower than those available for other RACs. EPA believes that these RACs desiring higher coverage should assume the same financial responsibility as all other RACs. EPA believes that the market-test approach to indemnification is not suitable for SITE program participants accordingly, they will be eligible for indemnification if they meet the other criteria of the guidelines (e.g., diligent efforts). EPA has also provided similar limits and deductibles for RACs with innovative technologies where they are subcontractors for remedial actions. Indemnification of RACs Working for States Comments: EPA stated in the proposal that it will indemnify RACs working for states, political subdivisions or federally-recognized Indian tribes that have entered into a cooperative agreement with EPA for work initiated at NPL or removal sites. Commenters agreed that RACs working for states under cooperative agreements should receive the same indemnification as those working for EPA. A few commenters questioned whether states without their own authority to offer indemnification could indemnify RACs or pay any cost-share towards indemnification claims. Response: The proposal and final guidelines provide for indemnification of RACs working under EPA cooperative agreements pursuant to federal law, not state law. These indemnification agreements are offered by EPA and implemented through and governed by the terms and conditions of those cooperative agreements. The costs of any indemnification claim will not be a cost-share item that will require payments from states, political subdivisions or federally-recognized Indian tribes that have entered into a cooperative agreement with EPA for work initiated at NPL or removal sites. {pg 5982} States may indemnify RACs pursuant to state law, and some states do. Such state programs are subject to independent state authority (not CERCLA section 119 and these guidelines) and are financed solely with state funds. Indemnification of RACs Working for Potentially Responsible Parties Comments: In the proposal EPA stated that it would not exercise its authority to indemnify RACs employed by potentially responsible parties (PRPs). Commenters disagreed with EPA's decision. The rationale they offered to support indemnification of RACs working for PRPs was that these RACs need to be indemnified just as other RACs. One commenter said that it would reduce the number of RACs willing to work for PRPs. Response: EPA disagrees and will not offer indemnification to RACs working for PRPs. Each time EPA indemnifies a RAC, it increases the exposure of the federal government to payment for indemnification claims. EPA believes that RACs and PRPs will be able to decide upon the terms of their contractual relationship, including those on private-party indemnification, if any, without the involvement of EPA. EPA believes that its policy will not impede site cleanups by PRPs. In granting EPA discretionary authority for very limited indemnity of RACs working for PRPs, Congress imposed strict requirements that are quite difficult for these RACs to meet. In fact, few requests for such indemnification have been received. Coverage of On-Site Work Comments: Commenters disagreed with paragraph 19(a) of the proposal which states that EPA's indemnification will only cover work directly related to site cleanup. They argued that the statutory language does not place this restriction on indemnification. Response: EPA does not agree. This provision reflects the general and specific limitations imposed by section 119(c) and the use of the term "facility" in the statutory definition of response action contract. In any event, EPA believes as a matter of policy that indemnification should be limited to RACs" activities directly related to site cleanup. EPA also believes that these are the contractors with the most potential to cause a release. Requirement to Purchase Insurance Comments: Commenters disagreed with the proposed requirement that RACs with cost-reimbursement contracts annually increase their insurance coverage. The proposal stated that RACs that receive EPA indemnification must increase the amount of pollution liability insurance they purchase by 25% each year unless EPA determines that the increased amount of insurance is not available. Commenters also questioned what criteria EPA would use to make this decision, and how EPA would determine what would be a reasonable price. Response: This requirement was put in the proposal to decrease a RAC's need for EPA indemnification and to increase the role of the private sector. Insurance is available from the private sector, and some RACs have been directed to purchase insurance under the ARCS contracting program. EPA has reimbursed RACs for the cost of the insurance. EPA has and will continue to produce guidance on insurance prices as the insurance market situation warrants. Perform Regulatory Flexibility Analysis Comment: EPA should perform a regulatory flexibility analysis. Response: Whenever an agency is required by law to publish a general notice of proposed rulemaking, the Regulatory Flexibility Act of 1980 (5 U.S.C. 601-612) generally requires that the agency prepare a Regulatory Flexibility Analysis (RFA) describing the impact of the proposed rule on small entities. Because the guidelines are not required to be published as a notice of proposed rulemaking under section 553 of the Administrative Procedure Act or any other law, they are not subject to the RFA requirements of the Regulatory Flexibility Act. Section 126 Grantees Comment: EPA should indemnify organizations that train hazardous waste cleanup workers under CERCLA section 126 grants. Response: Section 126 grantees are eligible for indemnification under the final guidelines with similar limits and deductibles available to SITE participants. Guidelines Document EPA Indemnification of Superfund Response Action Contractors Introduction These guidelines fulfill the requirement of CERCLA section 119(c)(7), as implemented by Executive Order 12580, that EPA develop guidelines to carry out CERCLA section 119(c). 1. Purpose These guidelines provide policies and procedures by which the Environmental Protection Agency (EPA) may indemnify response action contractors (RACs) for third- party claims that result from a release of a hazardous substance, pollutant or contaminant due to RAC negligence arising out of response action activities at a National Priorities List (NPL) or removal action site. 2. Authority These guidelines are required by section 119(c)(7) of the Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (CERCLA), 42 U.S.C. 9601, et seq., as amended by the Superfund Amendments and Reauthorization Act of 1986 (SARA), Public Law 99-499. In E.O. 12580, the President delegated to EPA the responsibility for issuing section 119 guidelines (52 FR 2923 (Jan. 29, 1987)). 3. Scope These guidelines govern indemnification by EPA of all RACs that perform response work under contract at NPL or removal action sites for EPA, for states (or political subdivisions) under CERCLA cooperative agreements with EPA, and for potentially responsible parties (PRPs) under a CERCLA administrative order or consent decree. EPA interprets section 119 to permit the Agency to provide indemnification to RACs working for federally-recognized Indian tribes pursuant to a CERCLA section 104 cooperative agreement with EPA. These guidelines also apply to EPA indemnification of SITE program participants conducting field demonstrations pursuant to CERCLA section 311(b), recipients of training grants under SARA section 126(g), and RACs working for other federal agencies (such as the U.S. Army Corps of Engineers) at EPA-lead sites under a Memorandum of Understanding (MOU) or an Inter-Agency Agreement with EPA. Where other federal departments or agencies indemnify RACs under section 119 authority, the indemnification agreements must not be inconsistent with these guidelines. 4. Application (a) These guidelines govern EPA's indemnification of RACs for response work initiated after October 17, 1986, the date of enactment of SARA. These guidelines supersede OSWER Directive 9835.5, "EPA Interim Guidance on Indemnification of Superfund Response Action Contractors Under Section 119 of SARA." {pg 5983} (b) These guidelines govern all RAC indemnification by EPA for future response action contracts. (c) Contract indemnification terms under EPAAR 1552.228-70 rather than these guidelines will apply to work performed at a site after the date of enactment of SARA only if response work at the site was initiated under an EPA contract prior to SARA's date of enactment. Indemnification agreements granted under the terms of OSWER Directive 9835.5 (EPA's Interim Guidance) will be replaced, through a negotiated agreement, with terms and conditions that are consistent with the policies found in these guidelines. (d) Subject to all the requirements of these guidelines, any indemnification agreement provided by EPA to a prime contractor may be provided by the prime contractor to its subcontractors if the agreement is approved by EPA at the time of the award of the subcontract. That is, the prime contractor can agree to indemnify a subcontractor, and EPA may indemnify the prime contractor with respect to the prime contractor's obligations that may arise as a consequence of its indemnification of the subcontractor (see section 9, below). (e) Consistent with EPA policy that a fair portion of subcontracts be awarded to small, minority and women-owned businesses, prime contractors shall fully consider the needs of these RACs with regard to indemnification. 5. Abbreviations CERCLA-Comprehensive Environmental Response, Compensation, and Liability Act of 1980 (as amended) EPAAR-EPA Acquisition Regulations FAR-Federal Acquisition Regulations NPL-National Priorities List OSWER-EPA's Office of Solid Waste and Emergency Response PRP-Potentially Responsible Party RAC-Response Action Contractor SARA-Superfund Amendments and Reauthorization Act of 1986 SITE-Superfund Innovative Technology Evaluation 6. Definitions Terms not defined in this section have the meaning given by CERCLA and Sec. 300.5 of the "National Oil and Hazardous Substances Pollution Contingency Plan." (40 CFR 300.5 (1991)). Claim means the receipt by the RAC of a written demand for money, naming the RAC and alleging a release of any hazardous substance or pollutant or contaminant caused by the RAC's response action activities. Indemnification, for the purpose of these guidelines, means an agreement under which EPA will compensate certain losses suffered by a RAC, and the actual payment of that compensation. Non-federal sources means commercial insurance, state indemnification, self-insurance, or other alternative risk transfer mechanisms. Occurrence, means a release, including continuous or repeated, of any hazardous substance or pollutant or contaminant. Response Action Contractor, as provided in CERCLA section 119(e)(2), means any person who enters into a response action contract to provide services (including construction) related to any release or threatened release of a hazardous substance or pollutant or contaminant from a facility, and any person, hired or retained by such a person, providing such services. It includes recipients of cooperative agreements under section 311(b) of CERCLA and recipients of grants pursuant to section 126(g) of SARA. It also includes any surety who, after October 16, 1990, and before January 1, 1993, provides a bid, performance or payment bond to a response action contractor, and begins activities to meet its obligations under such bond, but only in connection with such activities or obligations. Response Action Contract, as provided in CERCLA section 119(e)(1), means any written contract or agreement entered into by a RAC with the President; any federal agency; a state, political subdivision, or a federally-recognized Indian tribe under a CERCLA section 104 cooperative agreement with EPA; or any PRP under an order or decree, to provide remedial action at an NPL site or removal action. SITE, means the program developed under CERCLA section 311(b) which directs EPA to establish an "Alternative or Innovative Treatment Technology Research and Demonstration Program." This program accelerates the development of, and demonstrates, evaluates, and disseminates information about new and innovative treatment technologies. Indemnification Requirements, Terms, and Conditions 7. Indemnification Request (a) EPA will not indemnify RACs that fail to meet the requirements of CERCLA section 119 and of these guidelines. EPA will not enter into an indemnification agreement with a RAC until the RAC submits the documentation required by CERCLA section 119 and described in these guidelines. (b) To be eligible for indemnification by EPA, the RAC shall submit evidence of the following: (i) That its potential third-party liability is not covered by pollution liability insurance available at a fair and reasonable price at the time the contract to perform a response action is entered into, and that adequate pollution liability insurance is not generally available; (ii) That it has made diligent efforts to obtain insurance coverage from non-federal sources (or, if it is a cost- reimbursement RAC, it has satisfied the minimum insurance requirements of section 10(c), below), and; (iii) Under a multi- site contract, that the RAC also has made (or agrees to continue to make) such diligent efforts (or, if it is a cost reimbursement RAC, it will otherwise satisfy the requirements of section 10(c)) every time it begins work at a new facility. (c) Due to the variability of market conditions, EPA will determine on a case-by-case basis whether adequate insurance is available at a fair and reasonable price at the time indemnification documentation is submitted. This determination will be based on the documentation submitted in fulfillment of the diligent efforts requirement, or on any other insurance market information available to EPA. In its determination of a fair and reasonable price for insurance, EPA will consider what a prudent business person in the private sector would purchase after weighing the following criteria and other relevant factors: The insurance rate applied to each $100 of receipts. The deductible or self-retention rate associated with the policy. The projected work load and nature of the risk associated with the work to be covered by the policy. The amount and type of pollution liability coverage and limit provided by the policy. Exclusions and limitations of the policy. The effective date of the policy. The period of coverage. The amount of coverage, if any, extended to subcontractors. The receipts used in determining the insurance rate. Other risk sharing mechanisms available. (d) To demonstrate that diligent efforts have been made to obtain non-federal pollution liability insurance coverage, a RAC must submit in writing: (i) The names and addresses of three commercial insurers or alternative risk financiers to whom the RAC or its broker has submitted applications. If the {pg 5984} number of names and addresses is fewer than three, then a statement justifying the reduced number; and either, (ii) A statement from a recognized professional insurance broker stating that the broker has attempted to secure pollution liability insurance coverage on behalf of the RAC, and summarizing premiums, terms and conditions; or stating that pollution liability insurance was unavailable and giving the reasons for its unavailability for the RAC. (iii) A copy of each application submitted, insurance policies offered (including the declaration page), and any rejection letters received. If pollution liability insurance was offered by a commercial insurer, but not accepted by the RAC, an explanation of the reasons why such coverage was rejected must be included; or (e) EPA will not enter into an indemnification agreement until the RAC has submitted the documentation required in subsection (b) and (d). EPA will not enter into an indemnification agreement if it determines that the documentation submitted is insufficient, or if it determines that the RAC's efforts to obtain insurance were not sufficiently diligent. (f) If the RAC is working under a multi-site contract, the diligent efforts information must be updated and resubmitted before the RAC begins work at a new facility (as part of the indemnification agreement, the RAC will have agreed to continue to make such diligent efforts each time work is started at a new facility (see subsection (b)(iii), above)). However, if previously purchased insurance covers work at the new facility, then there is no need to submit additional documentation for that site. (g) EPA reserves the right to change the frequency and content of documentation submittal requirements, and also to direct indemnified RACs to purchase insurance from insurers identified by EPA. 8. Indemnification Terms and Conditions (a) Where EPA has agreed to indemnify a RAC, EPA will indemnify the RAC against third-party liability (including the expenses of litigation or settlement) for negligence arising from the RAC's performance in carrying out the response action activity. Such indemnification shall apply only to such liability not compensated by insurance or otherwise and shall apply only to liability which results from a release of a hazardous substance, pollutant, or contaminant if such release arises out of the response action activities of the contractor. (b) EPA indemnification is subject to limits and deductibles. For the purpose of determining the amount of the indemnification limit and deductible, the expenses of litigation or settlement are considered part of the liability covered by the indemnification agreement. (c) The amount of the indemnification limit and deductible depends on the type and dollar value of the contract entered into (see below). (i) The indemnification limit is defined on a per occurrence/aggregate basis with a contract aggregate limit. (ii) The indemnification deductible is on a per occurrence basis. (d) EPA indemnification will not cover liabilities (including the expenses of litigation or settlement) that were caused by the conduct of the RAC (including any conduct of its directors, managers, staff, representatives or employees) which constituted gross negligence or intentional misconduct. Nor shall the RAC be indemnified for liability arising under strict tort liability, or any basis of liability other than negligence. (i) EPA indemnification will cover the expenses of litigation or settlement subject to the terms and conditions of the indemnification agreement (such as limits and deductibles). In addition, EPA indemnification will apply if the RAC is found not to be liable for alleged negligence, or if a negligence suit is settled. (ii) EPA indemnification will not apply if the RAC is found both strictly liable and negligent, and the cause of action is not divisible. (e) If a RAC has a CERCLA section 119 indemnification agreement with EPA, the RAC must notify EPA of any claim or action against the RAC that may involve EPA indemnification, within twenty working days after receiving notice of any claim or action. The RAC must also notify its insurer(s) of any claim or action that may involve EPA indemnification, even if the RAC believes that its insurance is not applicable to the claim or action, within twenty working days upon receiving notice of any claim or action (or a shorter period if required by the terms of the insurance policy). Indemnification is conditional on EPA's receipt from the RAC of copies of the complaint (or other claim), and of the notice to the insurer within twenty working days of receiving notice of any claim or action. The insurer's response must be forwarded to EPA promptly after receipt by the RAC. (f) Coverage Term: The coverage term is subject to the other terms and conditions listed in this document. (i) An EPA indemnification agreement will cover claims arising (and reported to EPA) during the period of performance of the contract, plus claims submitted to EPA within ten years after the contract term. (ii) For multi-site contracts, the ten-year coverage term, with respect to an individual site, begins with the completion of work (as specified in the Work Assignment or other relevant work order) at the site. (g) Limits, Deductibles, and Purchased Insurance: Any pollution liability insurance (or self-insurance) acquired or maintained by the RAC to meet the requirements of sections 7 or 10 of these guidelines reduces the limit of EPA indemnification on a dollar-for- dollar basis. Further, the RAC must exhaust both the available insurance coverage and the EPA deductible (found in the indemnification agreement) before EPA will make an indemnification payment. (h) See section 20 below for additional terms and conditions. 9. Subcontractors-General Provisions (a) EPA will not agree to indemnify subcontractors directly. However, with the prior written permission of EPA, prime contractors may indemnify their subcontractors. Thus, EPA will provide no more than one indemnification agreement per contract, regardless of the number of sites where work will be performed under the contract, with that agreement affording coverage to the prime contractor, including any obligation the prime contractor may incur as a result of its indemnification agreements with its subcontractors. (See also the approval requirement in subsection (b), below.) This section does not apply to a prime contractor that chooses to share its indemnification with a team subcontractor. In this situation the coverage received by the team subcontractor would subtract from the prime contractors coverage and not be an additional exposure to EPA. (b) Under an EPA indemnification agreement, the prime contractor may confer indemnification on the subcontractor by including in the subcontract an indemnification clause by which the prime contractor agrees to indemnify the subcontractor. That indemnification clause must have terms and conditions (except for limits and deductibles, see below) identical to those found in the clause by which EPA agrees to indemnify the prime contractor. EPA will indemnify the prime contractor with respect to any liability incurred by the subcontractor(s) pursuant to an indemnification {pg 5985} agreement between the prime contractor and any subcontractor (subject to the indemnification limits and deductibles specified in the prime contract). EPA, however, must give prior approval (in writing) of the subcontract which contains the indemnification agreement between the prime contractor and subcontractor. (c) Subcontractors receiving indemnification through the prime contractor are subject to all indemnification requirements, terms, and conditions of these guidelines. These applicable requirements include the reporting requirements of section 7, above. That is, the subcontractor must demonstrate that it has made diligent efforts to obtain pollution liability insurance, and agrees to continue to make such efforts. The subcontractor shall forward all documentation to the prime contractor, and the prime contractor shall forward copies of the documentation to the contracting officer (or other appropriate EPA official). It will be the responsibility of the prime contractor to monitor the diligent efforts of its subcontractors based on the feedback from EPA during EPA's review of the prime contractor's diligent efforts. The contracting officer (or other appropriate EPA official) may consent to the subcontract including the indemnification clause (see section 9(b), above) only if the contracting officer (or other appropriate EPA official) has determined, based on the documentation supplied by the subcontractor to the prime contractor or information supplied by the prime contractor, that the subcontractor has satisfied the reporting requirements of section 7. A demonstration of diligent efforts by the prime contractor is not sufficient to demonstrate that, by implication, insurance is unavailable to the subcontractor. Indemnification Terms and Conditions for Specific Contract Types 10. RACs Working for EPA Under Cost-Reimbursement Contracts (a) For cost-reimbursement contracts entered into after the promulgation of these guidelines, EPA will not offer indemnification agreements in its solicitations. If there is a lack of adequate competition in response to the solicitation that can be linked to the absence of indemnification, then a new or amended solicitation may be issued that states that indemnification will be available to the successful offeror. If EPA does offer indemnification, the agreement will be subject to the paired limits and deductibles listed in subsection (g) and (h) below. EPA retains the right to incorporate other provisions of this policy (e.g., coverage for subcontractors) when appropriate. (b) RACs working for EPA under cost-reimbursement contracts must procure and maintain all insurance required by law or regulation including: (i) Insurance required by part 28 of the Federal Acquisition Regulations for cost- reimbursement contracts, (ii) Commercial general liability insurance for bodily injury, death or loss of or damage to property of third persons in the minimum amount of $500,000 per occurrence, and, (iii) Any additional insurance EPA may require. (c) Indemnification and Insurance: Any RAC working for EPA under a cost- reimbursement contract who requests that EPA enter into an indemnification agreement must procure and maintain pollution liability insurance for bodily injury, death or loss of or damage to property of third persons in the minimum amount of $1,000,000 per occurrence (or self-insure for the same), or it must demonstrate that it has made diligent efforts to obtain such pollution liability insurance and, despite such diligent efforts, has failed to procure reasonably-priced insurance. RACs under a multi-site contract must agree to continue to make such diligent efforts each time work begins at a new site. EPA will not agree to indemnify a RAC who does not purchase the required insurance or demonstrate diligent efforts, nor will EPA make indemnification payments to a RAC who has entered into an indemnification agreement but has failed to demonstrate adequately that it has made diligent efforts each time work started at a new site (except as provided in section 7(f), above). (i) The RAC must obtain and maintain pollution liability coverage for professional liability and/or general liability, as appropriate. (ii) The minimum amount of pollution liability insurance to be purchased must increase by 25% per year unless EPA determines that the increased amount of insurance is not generally available at a fair and reasonable price. Thus, where "t" is defined as the number of years elapsed since promulgation of these guidelines, the minimum amount of pollution liability insurance required in year t is equal to: 1 million * (times) 1.25 (sub) t (iii) The demonstration of "diligent efforts" is defined in section 7(d), above. Those diligent efforts must be deemed satisfactory by EPA. (d) Reimbursement: RACs working for EPA shall submit to the contracting officer for prior approval all insurance policies (or documentation of all self-insurance plans) for which reimbursement will be sought from EPA. (e) Any loss incurred within the EPA indemnification deductible amount (see below) will not be reimbursed to the RAC as either a direct or an indirect cost. All deductibles, with the exception of co-payments above $50 million (see below), must be met by the RAC as the first financial obligations of the claim and must be paid by the RAC before any payments are made by EPA. The RAC may purchase insurance to cover the indemnification deductible amount, but the cost of that insurance is not reimbursable (nor is any loss within the deductible amount of that insurance reimbursable as either a direct or indirect cost). (f) Self-Insurance: If a RAC proposes to self-insure against pollution liability, and seeks reimbursement for the cost of self- insurance or seeks to satisfy the minimum requirement of section 10(c) through self-insurance, it must demonstrate to EPA financial responsibility for the amount of self-insurance proposed. Financial responsibility may be demonstrated by letter of credit, surety bond, trust fund, escrow account, or other method approved by the EPA Contracting Officer. (i) A demonstration of financial viability, by itself, does not constitute an adequate demonstration of financial responsibility. (ii) To be eligible for reimbursement of the cost of self-insurance, a RAC must satisfy the applicable requirements of 48 CFR Parts 28 ( Bonds and Insurance ), 30 ( Cost Accounting Standards ), and 31 ( Contract Cost Principles and Procedures ), and 4 CFR Part 416 ( Accounting for Insurance Costs ). (g) Limits and Deductibles for RACs with contracts entered into before the date of promulgation of these guidelines (with indemnification) with EPA, another federal agency working at EPA sites under an inter-agency agreement (IAG), or a state or political subdivision of a state, or a federally-recognized Indian tribe having a cooperative agreement with EPA to clean up Superfund sites: The limit and associated deductible included in the indemnification agreement shall be the subject of negotiation by EPA and the RAC at the time of contract modification in one of the following amounts as {pg 5986} governed by the restrictions in subsection (h) below: Limit (occurence/aggregate) $2 million Deductible (occurence) $20,000. Limit (occurence/aggregate) 5 million Deductible (occurence) 50,000. Limit (occurence/aggregate) 10 million Deductible (occurence) 100,000. Limit (occurence/aggregate) 25 million Deductible (occurence) 250,000. Limit (occurence/aggregate) 50 million Deductible (occurence) 1.0 million. (h) The RAC may select from the limits/deductibles as follows: A RAC with a single-site contract of less than $10 million may choose any pair of limits/deductibles that has a limit of $10 million or less. A RAC with a single-site contract of $10 million to $25 million or a multi-site contract of less than $25 million may choose any pair of limits/deductibles that has a limit of $25 million or less. A RAC with a contract of $25 million or more may choose any pair of limits/deductibles that has a limit of $50 million or less. (i) For contracts of long duration (longer than five years), the RAC may choose a higher limit of $75 million, with a $2 million deductible and co-payments (dollar for dollar) by the RAC above $50 million. (j) Subcontracts: (i) For subcontractors that perform services and are retained through the subcontracting pool of cost reimbursement contracts subject to subsection (i) above, the prime contractor may flowdown up to $15 million coverage in the aggregate to subcontractors. This coverage is separate from the prime's limit and cannot be used by the prime contractor for additional coverage above its limit as described in this section. The prime may not grant more than $5 million coverage to any single subcontractor under this paragraph, and the associated deductible shall be $50,000 per contract aggregate for each indemnification agreement with a subcontractor. (ii) EPA may offer indemnification to innovative technology subcontractor RACs who provide innovative technologies under a contract to provide remedial action (RA) construction services and that fall within the definition of a RAC under CERCLA section 119(e)(2)(B) if EPA determines that the technology has special value to the Superfund program. These RACs must have made diligent efforts to obtain pollution liability insurance from non- federal sources which were unsuccessful. These RACs may choose from the following limit and deductible pairs: Limit (occurence/aggregate) $2 million Deductible (occurence) $10,000 Limit (occurence/aggregate) 5 million Deductible (occurence) 25,000 Limit (occurence/aggregate) 10 million Deductible (occurence) 50,000 Limit (occurence/aggregate) 25 million Deductible (occurence) 200,000 (iii) Subcontractors under contracts subject to section 10(i) performing remedial action (RA) work will be subject to the same requirements as RACs under section 11 below. Prime contractors may not offer EPA indemnification in their solicitations for remedial action (RA) work unless there is a lack of adequate competition in response to the solicitation that can be linked to the absence of an indemnification. Then EPA may permit a new or amended solicitation to be offered that states that indemnification will be available to the successful bidder/offeror. (iv) Subcontractors that meet the conditions of both paragraphs (ii) and (iii) above may choose from either the scale in section 10(j)(ii) or the coverage available under section 11, but not both. 11. Indemnification of RACs Working for EPA under Firm Fixed Price Contracts (a) General: Although the Government is not ordinarily concerned with a contractor's insurance coverage if the contract is a fixed-price contract, EPA recognizes that a RAC cleaning up a Superfund site may require protection against third-party liability, and that, in some cases, adequate insurance may not be available. In such cases, and from a bidder's perspective, EPA indemnification may be a prerequisite to clean-up activities at the site. For future fixed-price contracts, EPA will not offer indemnification in its solicitations. If there is a lack of adequate competition in response to the solicitation that can be linked to the absence of indemnification, then a new or amended solicitation may be issued which states that indemnification will be available to the successful bidder. EPA retains the right to incorporate other provisions of this policy (e.g., coverage for subcontractors), when appropriate, into future contracts and solicitations. If indemnification is available under the solicitation , the RAC must meet all of the requirements specified in section 7 (above); and the indemnification agreement will contain a limit and a deductible as prescribed in section 10 (g) and (h) above. (b) RACs working for EPA under fixed-price contracts will not be reimbursed for the cost of pollution liability insurance (except indirectly, i.e. and to the extent that the cost of such insurance may be reflected in the fixed price). (c) If EPA offered indemnification to RACs currently under contract with EPA or another federal agency working at EPA sites under an inter-agency agreement (IAG), the agreement will contain a limit and a deductible as prescribed in sections 10(g)(h) above. (d) If EPA offers indemnification to a fixed price innovative technology RAC, the RAC must demonstrate that it has made diligent efforts to obtain pollution liability insurance from non-federal sources as specified in section 7 above. If adequate insurance is not available at a fair and reasonable price, the limit and deductible amounts of EPA indemnification available to the RAC are: Limit (occurence/aggregate) $2 million Deductible (occurence) $10,000 Limit (occurence/aggregate) 5 million Deductible (occurence) 25,000 Limit (occurence/aggregate) 10 million Deductible (occurence) 50,000 Limit (occurence/aggregate) 25 million Deductible (occurence) 200,000 (e) If EPA offers indemnification, any RAC that is the successful bidder to a solicitation that requires innovative technology or uses innovative technology may select limits/deductibles as stated in section 11(d) or in section 10(g) and (h) above. If the RAC uses a subcontractor to provide and/or operate the innovative technologies, the subcontracted RAC may also choose from the limits and deductibles in section 11(d) above. 12. Indemnification of RACs Working for EPA under Negotiated Fixed-Price Contracts (a) For the purpose of indemnification, RACs working for EPA under negotiated fixed-price contracts (including RACs under fixed-rate contracts with some cost elements reimbursable, such as Time-and-Materials Contracts) will be considered cost-reimbursement contractors. If a negotiated fixed-price RAC requests indemnification, it will be subject to the same insurance requirements and indemnification terms and conditions as cost-reimbursement contractors (see sections 7 and 10, above). 13. Indemnification of SITE Program RACs (a) Technology vendors participating in the SITE program are defined as RACs in CERCLA section 119(e)(2)(A). Thus, those RACs participating in the SITE program, under cooperative agreement with EPA, are eligible for indemnification. (b) SITE program RACs must make diligent efforts to purchase pollution {pg 5987} liability insurance from non-Federal sources as specified in section 7. (c) If adequate insurance is not available at a fair and reasonable price, EPA may offer indemnification to these RACs. The limit and deductible for EPA indemnification will be determined by the RAC from the following limit and deductible pairs: Limit (occurrence/aggregate) $2 million Deductible (occurence) $10,000 Limit (occurrence/aggregate) 5 million Deductible (occurence) 25,000 Limit (occurrence/aggregate) 10 million Deductible (occurence) 50,000 Limit (occurrence/aggregate) 25 million Deductible (occurence) 200,000 (d) EPA will not indemnify SITE program RACs with respect to facilities which receive waste for disposal, treatment (except for small-scale demonstration testing), or storage independently of the SITE technology demonstration. (e) EPA may indemnify SITE program RACs with respect to any work conducted at a federal facility (as described in CERCLA section 120 except as stated in subsection (f), below). (f) If a SITE demonstration project is funded by a party other than EPA (including federal agencies), then the SITE RAC will be considered, for the purpose of indemnification, a RAC employed by that party. For example, if a SITE RAC is conducting a demonstration funded at least in part by a PRP, then EPA will not indemnify the RAC (see section 17, below). 14. Indemnification of RACs Receiving Grants Under SARA section 126(g) EPA may indemnify RACs receiving grants under SARA section 126(g). They will be subject to the terms and conditions for SITE program RACs in section 13 above. 15. Indemnification of RACs Employed by States or Political Subdivisions of States, or Federally-Recognized Indian Tribes (a) General: EPA has been granted discretionary authority to indemnify RACs employed by states, political subdivisions of states, or federally-recognized Indian tribes that have entered into a cooperative agreement with EPA for new work initiated at NPL or removal action sites after the date of enactment of SARA. EPA may indemnify such RACs upon the written request of the state, political subdivision of a state, or a federally-recognized Indian tribe. If EPA agrees to indemnify a RAC employed by such an entity, the indemnification will be embodied in the cooperative agreement through insertion of a special condition. (b) Requirements for EPA Indemnification: The procedures for entering into indemnification agreements with RACs working for states (or political subdivisions) or federally-recognized Indian tribes under cooperative agreements are identical to those for RACs working directly for EPA as outlined in sections 10 and 11 above. That is, RACs under current contracts with indemnification may choose a limit and a deductible as outlined in section 10(g) and (h) above. For future contracts, EPA will not nor will states (or political subdivisions) or federally-recognized Indian tribes under cooperative agreements offer (EPA) indemnification in solicitations. If there is a lack of adequate competition in response to the solicitation that can be linked to the absence of indemnification, then a new or amended solicitation may be issued that states that an indemnification agreement will be available to the successful bidder/offeror. In addition, before EPA will enter into an indemnification agreement, proof of the following must be supplied to EPA: (i) The RAC's contract concerns new site work initiated at an NPL or removal action site after the date of enactment of SARA; and (ii) The RAC's contract is directly related to site cleanup. (c) Terms and Conditions: The terms and conditions stated in section 8 above shall apply to any indemnification agreement offered under this section. (d) EPA may agree to indemnify a RAC working for a state (or political subdivision) or federally- recognized Indian tribe even if that entity has also agreed to indemnify the RAC. In that case, responsibility for making indemnification payments will be held jointly by the EPA and the state (or political subdivision or federally-recognized Indian tribe) under a cooperative agreement with EPA. Unless otherwise stated in the cooperative agreement, responsibility for making indemnification payments will be divided equally between EPA and the state (or political subdivision or federally-recognized Indian tribe). Any indemnification payments made by EPA, however, are subject to the limits and deductibles specified in the indemnification agreement. (e) EPA may agree to indemnify a RAC which is required under the terms of its contract with a state (or political subdivision) or federally-recognized Indian tribe to indemnify and hold harmless such contracting entity from claims, damages, losses and expenses, including litigation costs, that arise out of the RAC's performance of the contract. However, any costs or expenses payable to the state (or political subdivision) or federally-recognized Indian tribe under such indemnification are the sole responsibility of the RAC and are not covered under EPA's indemnification of the RAC or otherwise an eligible expense of the cooperative agreement. 16. Indemnification of RACs Employed by Federal Agencies Other Than EPA (a) General Rule: Under CERCLA section 119 (as implemented by E.O. 12580), other federal agencies and departments are granted discretionary authority to indemnify RACs they employ at NPL or removal action sites from the date of enactment of SARA. Other federal agencies and departments that indemnify RACs under section 119 must use their own appropriations to pay all indemnification costs; in addition, the indemnification agreements must not be inconsistent with these guidelines. (b) RACs employed by other federal departments and agencies (e.g., the Army Corps of Engineers) at EPA-lead NPL or removal action sites, managed pursuant to an interagency agreement with EPA, are subject to the same provisions of these guidelines as are RACs employed by EPA. Thus, the same indemnification terms and conditions offered to RACs employed by EPA may be offered to RACs employed by other agencies at EPA-lead NPL or removal sites under interagency agreements with EPA. 17. Indemnification of RACs Employed by PRPs CERCLA section 119(c)(5)(C) gives EPA the discretionary authority to enter into an indemnification agreement with a RAC employed by any potentially responsible party (PRP) which has entered into a written agreement (such as a consent decree) with EPA. EPA will not exercise that discretionary authority, i.e. EPA will not agree to indemnify a RAC under contract with a PRP. 18. Indemnification of Surety Firms CERCLA section 119(e)(2)(C) defines RACs to include sureties that provide bid, performance or payment bonds to a RAC after October 16, 1990, and before January 1, 1993, and begin activities to meet their obligations under such bonds. EPA indemnification extends to sureties that provide performance bonds to RACs and begin activities to meet their obligations under such bonds. That is, the surety will be covered by the indemnification agreement of the defaulting RAC if the bond is activated, {pg 5988} subject to all of the requirements of these guidelines. Other Issues 19. Exclusion of Facilities That Receive Waste (a) EPA is prohibited by CERCLA section 119(c)(5)(D) from providing indemnification to owners or operators of facilities regulated under the Solid Waste Disposal Act, as amended, with respect to response activities performed at, or potential liability related to, those facilities. (b) Under section 119, EPA will not agree to indemnify any owner or operator of a facility that receives solid or hazardous waste (for disposal, treatment, or storage), including publicly owned treatment works (POTWs), with respect to that facility. This applies to a facility regardless of whether or not it is subject to the permit-by-rule provisions, or any other provision of the Solid Waste Disposal Act. 20. Other Terms and Conditions (a) EPA will indemnify only RACs performing work directly related to site cleanup. (b) At any time, EPA may cancel its indemnification of a RAC due to a material misrepresentation or a failure on the part of the RAC to provide necessary information, act in good faith, or satisfy any other term or condition of its indemnification agreement. (c) EPA reserves the right to add such additional terms and conditions to its RAC indemnification agreements as it deems necessary. Such terms and conditions will be consistent with CERCLA section 119. 21. Claims Notifications and Processing (a) The RAC shall provide written notification to the contracting officer (or other EPA official designated in the indemnification agreement) within twenty working days upon receiving notice of any claim or action that may involve EPA indemnification under section 119. EPA will not provide indemnification payments for costs incurred prior to its receipt of written notice from the RAC. Notice must include a copy of the complaint or other claim, or, if no written claim has been received, available information on the time, place, and circumstances involved and the names and addresses of the injured and of available witnesses. (b) The RAC shall notify its insurers within twenty working days (or a shorter period if required by the terms of the insurance policy) of any claim or action that may involve EPA indemnification, even if the RAC believes that its insurance is not applicable to the claim or action. The RAC shall provide to the contracting officer (or other designated person) a copy of any correspondence from the insurance company, including any notice of denial of coverage. (c) The RAC shall furnish evidence or proof related to any claim that may involve indemnification payments in the manner and form required by EPA. (d) The RAC shall furnish to EPA complete photocopies of all of the RAC's insurance policies that were in force at the time of the response action, and all those in force at the time of the notice of claim. (e) EPA reserves the right to direct, control, or assist in the settlement or defense of any claim or action against an indemnified RAC. (f) The RAC shall not admit liability or settle any claim without EPA's written consent. (g) If EPA recommends settlement of a claim for an amount within the RAC's deductible, and the RAC refuses such settlement, EPA shall not be obligated to indemnify for any loss or obligation of the RAC relating to the claim in excess of the deductible. (h) If EPA recommends settlement of a claim for a total amount in excess of the RAC's indemnification limit (as specified in the contract) and the RAC refuses such settlement, EPA's obligation for any loss shall be limited to that portion of the recommended settlement and the costs, charges, and expenses (as of the RAC's refusal) that exceeds the deductible and falls within the limit of liability. (i) EPA reserves the right to make any claim payment either to the RAC or the claimant at its discretion. 22. Cost Recovery Under CERCLA section 119(c)(6), indemnification payments made by EPA to RACs are recoverable from PRPs as a government response cost under CERCLA section 107. EPA shall document any indemnification payments by following the same recordkeeping and reporting procedures as for all other response costs. 23. Limitation Nothing in these guidelines shall be construed as a waiver of sovereign immunity by the United States. Nothing in these guidelines shall be construed to establish the United States as a liable party, within the meaning of section 107 of CERCLA, for any release that has occurred or may occur in the course of any response action the United States undertakes pursuant to section 104 of CERCLA. In addition, EPA's agreement to indemnify any RAC, or EPA's payment of any money under an indemnification agreement, shall not be construed as a waiver of sovereign immunity by the United States, within the meaning of section 107 of CERCLA. Dated: January 13, 1993. Don R. Clay, Assistant Administrator Office of Solid Waste and Emergency Response.