Are the EPA-pattern guarantee and surety-bond forms that Connecticut underground storage tank owners use to prove financial responsibility legally enforceable contracts in Connecticut?

Formal Opinion 2014-3: UST guarantee and surety bond forms are enforceable in Connecticut, with conditions

Plain-English summary

The federal underground storage tank (UST) program requires owners and operators of regulated petroleum tanks to demonstrate financial responsibility for cleanup and third-party damages. Two of the EPA-blessed mechanisms (a guarantee from a financially capable affiliate and a surety bond from a Treasury-listed surety) only work if the State Attorney General confirms that the contract is legally valid and enforceable in that state. DEEP asked the Connecticut AG for that confirmation. The AG provided it, with three caveats: (a) the contract must comply with the specific Connecticut UST regulations; (b) it must satisfy the basic contract-law elements (offer, acceptance, consideration, mutual assent, capacity, lawful subject matter) and have no valid defense (unconscionability, fraud, duress); and (c) it must either be issued by an authorized Connecticut insurer or be issued as something incidental to other legitimate business, to avoid the unauthorized-insurer prohibition in Conn. Gen. Stat. § 38a-271(a). The AG also confirmed that DEEP could enforce the instruments as a third-party beneficiary because the form contracts expressly created a direct obligation to DEEP to fund the standby trust on DEEP's written instruction (citing Grigerik v. Sharpe).

Currency note

This opinion was issued in 2014. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here.

Background and statutory framework

Federal regulations at 40 C.F.R. part 280 require petroleum UST owners to demonstrate financial responsibility through one of several mechanisms. Two of those, the guarantee at 40 C.F.R. § 280.96(c) and the surety bond at 40 C.F.R. § 280.98(b), are conditioned on the AG of the state where the tanks are located submitting a written statement to the implementing agency confirming legal validity and enforceability. Connecticut adopted the federal forms verbatim in R.C.S.A. § 22a-449(d)-109. DEEP is the Connecticut implementing agency.

A guarantee runs to DEEP "and to any and all third parties, and obligees" (R.C.S.A. § 22a-449(d)-109(g)). If the owner/operator fails to clean up or fails to pay a third-party judgment, the guarantor must, on DEEP's written instructions, fund a standby trust the owner has already established. Allowable guarantors include a parent or affiliate with controlling interest, an entity controlled by a common parent, or a firm in a substantial business relationship with the owner. The guarantor must satisfy the regulations' financial-test self-insurance criteria.

A surety bond is a performance bond (R.C.S.A. § 22a-449(d)-109(i)). On DEEP notice of default, the surety must either perform the cleanup itself or place the bond's penal sum into the standby trust. The surety must be on the U.S. Treasury Department's Circular 570 list of acceptable sureties on federal bonds.

The AG's job under R.C.S.A. § 22a-449(d)-109(e)(2) was to confirm validity and enforceability. The EPA's preamble to the federal rule explained "legally valid and enforceable" to mean (1) the instrument satisfies the necessary contractual formalities of state law; (2) it satisfies the requirements for exclusion from regulation under state insurance laws; and (3) the procedures for drawing on the instrument under § 280.108 will be effective in the state. 52 Fed. Reg. 12786, 12803 (April 17, 1987).

What the AG concluded at the time

Forms satisfy Connecticut contract law in the abstract

The AG noted that whether any particular contract is valid is fact-specific. To be valid in Connecticut a contract requires offer and acceptance, mutual assent, consideration, capacity, and lawful subject matter (citing Finlay v. Swirsky). It can be invalidated by unconscionability, fraud, or duress (citing Hottle v. BDO Seidman). Assuming those elements are present and no defense applies, the form guarantee and surety bond are valid and enforceable.

The Unauthorized Insurers Act limits who can issue them

Conn. Gen. Stat. § 38a-271(a) defines "doing an insurance business" to include making a guarantee or suretyship contract "as a vocation and not merely incidental to any other legitimate business or activity of the guarantor or surety." So a guarantee or surety bond under R.C.S.A. § 22a-449(d)-109(g) or (i) is not an unauthorized-insurer problem if the entity is either a licensed Connecticut insurer or is issuing the contract as something incidental to its other business. The AG took no position on borderline cases; that determination depends on the facts of the relationship.

DEEP can enforce as a third-party beneficiary

Drawing on Grigerik v. Sharpe (Conn. 1998), the AG explained that a third-party beneficiary in Connecticut requires that the contracting parties intend the promisor to assume a direct obligation to the third party. The form guarantee and surety bond contained that intent on their face: the guarantor or surety was directly obligated to fund the standby trust on DEEP's written instruction. So the federal § 280.108 drawing procedure (mirrored in R.C.S.A. § 22a-449(d)-109(s)) was effective in Connecticut.

The bottom line

A guarantee or surety bond executed using the regulatory forms is enforceable in Connecticut if (a) it conforms to the specific UST regulation requirements; (b) it has the elements of a valid contract and no valid defense; and (c) it is issued by an authorized insurer or, if not, is issued as something incidental to other legitimate business of the issuer.

Common questions

Did the AG provide a blanket validation of every UST guarantee and surety bond?

No. The opinion was a general confirmation that the form contracts can be valid in Connecticut. Whether any specific contract was valid depends on the facts of execution.

Why does the federal program need an Attorney General sign-off?

Because the guarantee and surety bond are state-law contracts. The EPA's Final Rule preamble explained that the AG's written statement gives the implementing agency confidence that the instruments will hold up under state contract and insurance law and that the drawing procedures will work.

Does the unauthorized-insurer rule disqualify a parent company's guarantee?

Not necessarily. § 38a-271(a) carves out guarantees that are "merely incidental to any other legitimate business or activity of the guarantor or surety." A parent's guarantee of its subsidiary's environmental obligations would typically fit that exception, but the AG did not opine on individual cases.

Could DEEP collect from the surety on a third-party judgment?

Yes. The surety bond's terms (modeled on 40 C.F.R. § 280.98(b)) created a direct obligation: on DEEP's notice that the operator failed to compensate an injured third party, the surety must either perform the third-party liability compensation or place the penal sum in the standby trust.

Citations

• R.C.S.A. § 22a-449(d)-109(d) — financial responsibility requirement for petroleum UST owners.
• R.C.S.A. § 22a-449(d)-109(e)(2) — AG's written statement is precondition to using a guarantee or surety bond.
• R.C.S.A. § 22a-449(d)-109(g) — guarantee form and eligibility.
• R.C.S.A. § 22a-449(d)-109(i) — surety bond form and Treasury Circular 570 requirement.
• Conn. Gen. Stat. § 38a-271(a) — Unauthorized Insurers Act, with "incidental" exception.
• 40 C.F.R. §§ 280.96(c), 280.98(b), 280.108 — federal UST forms and drawing procedure.
• Finlay v. Swirsky, 103 Conn. 624 (1925) — elements of a valid Connecticut contract.
• Hottle v. BDO Seidman, LLP, 268 Conn. 694 (2004) — defenses to enforcement.
• Grigerik v. Sharpe, 247 Conn. 293 (1998) — third-party beneficiary doctrine.

Source

• Landing page: https://portal.ct.gov/AG/Opinions
• Original PDF: https://portal.ct.gov/-/media/ag/opinions/2014/2014-003_deep-opinion-usts_201404081342-pdf.pdf?rev=56396137b83543fb9c58c967722654a3

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain; the linked PDF is authoritative.

55 Elm Street
P.O. Box 120
Hartford, CT 06141-0120

GEORGE C. JEPSEN
ATTORNEY GENERAL

Office of The Attorney General
State of Connecticut
April 8, 2014

Yvonne Bolton
Bureau of Materials Management and Compliance Assurance
Department of Energy and Environmental Protection
79 Elm Street
Hartford, CT 06106-5127

Dear Ms. Bolton:

Pursuant to Regulations of Connecticut State Agencies ("R.C.S.A.") § 22a-449(d)-109(e)(2), you, on behalf of the Commissioner of Energy & Environmental Protection, have asked for a written statement from this office that a guarantee or surety bond executed as described in R.C.S.A. § 22a-449(d)-109 is a legally valid and enforceable obligation in the State of Connecticut. Subject to the parameters described below, we have concluded that it is.

By way of background, R.C.S.A. § 22a-449(d)-109(d) requires all owners and operators of petroleum underground storage tank systems ("USTs") that are regulated by R.C.S.A. §§ 22a-449(d)-1 and 22a-449(d)-101 through 22a-449(d)-113 ("Connecticut UST Regulations"), to "demonstrate financial responsibility for taking corrective action and for compensating third parties for bodily injury and property damage caused by accidental releases arising from the operation of petroleum underground storage tanks . . . ." Among the allowable mechanisms for demonstrating financial responsibility are a guarantee, as set forth in R.C.S.A. § 22a-449(d)-109(g), and a surety bond, as set forth in R.C.S.A. § 22a-449(d)-109(i). Pursuant to R.C.S.A. § 22a-449(d)-109(e)(2), "[a]n owner or operator may use a guarantee or surety bond to establish financial responsibility only if the Attorney(s) General of the state(s) in which the underground storage tanks are located has (have) submitted a written statement to the implementing agency that a guarantee or surety bond executed as described in this section is a legally valid and enforceable obligation in that state." The Department of Energy and Environmental Protection ("DEEP") is the implementing agency for the UST regulations in Connecticut.

Under the Connecticut UST Regulations, a guarantee is given to DEEP, "and to any and all third parties, and obligees." R.C.S.A. § 22a-449(d)-109(g). If the owner or operator fails to clean up a release from a UST or fails to pay a judgment or settlement for third party liability resulting from a UST release, the guarantor must, on written instructions from DEEP, fund a standby trust, which the owner or operator has already established. Id. A guarantee may be given by any of four types of entities: (i) a firm that possesses a controlling interest in the owner or operator; (ii) a firm that possesses a controlling interest in (i); (iii) a firm that is controlled through stock ownership by a common parent firm that possesses a controlling interest in the owner or operator; or (iv) a firm engaged in a substantial business relationship with the owner or operator and issuing the guarantee as an act incident to that business relationship. R.C.S.A. § 22a-449(d)-109(g)(1). "Substantial business relationship means the extent of a business relationship necessary under applicable state law to make a guarantee contract issued incident to that relationship valid and enforceable. A guarantee contract is issued 'incident to that relationship' if it arises from and depends on existing economic transactions between the guarantor and the owner or operator." R.C.S.A. § 22a-449(d)-109(c)(13). The guarantor must meet the Connecticut UST Regulations' financial test for self-insurance. R.C.S.A. § 22a-449(d)-109(g)(2).

The surety bond allowed by the Connecticut UST Regulations is a performance bond. R.C.S.A. § 22a-449(d)-109(i). If DEEP notifies the surety that the owner or operator failed to do a clean-up, the surety shall either do the clean-up itself or place the bond's penal sum into the standby trust. Id. If DEEP notifies the surety that the owner or operator failed to compensate injured third parties, the surety shall either "perform third-party liability compensation" or place the penal sum in the standby trust. Id. "The surety company issuing the bond shall be among those listed as acceptable sureties on federal bonds in the latest Circular 570 of the U.S. Department of the Treasury." R.C.S.A. § 22a-449(d)-109(i)(1).

The Connecticut UST Regulations include a form of acceptable guarantee, R.C.S.A. § 22a-449(d)-109(g)(3), and a form of acceptable surety bond, R.C.S.A. § 22a-449(d)-109(i)(2). These forms are identical to those found in the federal UST regulations, 40 Code of Federal Regulations ("C.F.R.") §§ 280.96(c) (guarantee) and 280.98(b) (surety bond). When the Environmental Protection Agency ("EPA") promulgated these regulations, it made clear that it was requiring the statement by the State Attorneys General as to validity and enforceability of the guarantee and the surety bond to insure that the instruments satisfied State law governing contracts and insurance. See Underground Storage Tanks Containing Petroleum; Financial Responsibility Requirements, 52 Fed. Reg. 12786, 12809-12815 (Proposed Rule, Apr. 17, 1987); 53 Fed. Reg. 43322, 43338-43340, 43345-43346, 43353-43354 (Final Rule, Oct. 26, 1988). "By legally valid and enforceable, the Agency [the EPA] means that (1) the instrument satisfies the necessary contractual formalities of the State's laws; (2) it satisfies the requirements for exclusion from regulation under the State's insurance laws; and (3) the procedures for drawing on the instrument found in § 280.108 of the proposed rule [R.C.S.A. § 22a-449(d)-109(s)] will be effective in the State." 52 Fed. Reg. 12786, 12803 (Proposed Rule, Apr. 17, 1987).

Whether any particular contract, as executed, is a valid contract under State law necessarily turns on the facts of each case. To have a valid contract under Connecticut law there must be, among other things, offer and acceptance, meeting of the minds, consideration, parties competent to contract, and proper subject matter. See Finlay v. Swirsky, 103 Conn. 624 (1925). Contracts may be invalid because they are unconscionable, or entered into pursuant to fraud or under duress. See Hottle v. BDO Seidman, LLP, 268 Conn. 694 (2004). The presence or absence of these elements in any given case will turn on the specific facts of each transaction; however, assuming that all the elements of a valid contract are in place, and that there are no valid defenses to the contract, the forms of guarantee and surety bond set forth in R.C.S.A. §§ 22a-449(d)-109(g) and 22a-449(d)-109(i), respectively, are valid and enforceable in Connecticut.

Under the Connecticut Unauthorized Insurers Act, an "insurer" is any entity that is "engaged as [a] principal[ ] in the business of insurance . . . ." Conn. Gen. Stat. § 38a-271(a). Among the acts that constitute "doing an insurance business" is "the making of or proposing to make, as guarantor or surety, any contract of guaranty or suretyship as a vocation and not merely incidental to any other legitimate business or activity of the guarantor or surety . . . ." Id. Thus, an entity that gives a guarantee or surety bond under R.C.S.A. §§ 22a-449(d)-109(g) or (i), will not run afoul of this provision if the entity is a licensed insurer in Connecticut or the guarantee or surety bond is made "incidental to other legitimate business or activity of the guarantor or surety."

Whether DEEP may draw on the instrument of guarantee or surety bond is a function of whether DEEP is a third party beneficiary entitled to enforce the instrument. Under Connecticut law, the creation of third party beneficiary rights turns on whether "the contracting parties intended that the promisor should assume a direct obligation to the third party." Grigerik v. Sharpe, 247 Conn. 293, 315 (1998) (internal quotation marks and citation omitted). The forms of guarantee and surety bond set forth in R.C.S.A. §§ 22a-449(d)-109(g) and 22a-449(d)-109(i), respectively, make clear that the contracting parties intend the guarantor or surety, as the case may be, to have a direct obligation to DEEP, namely to fund the standby trust on DEEP's written instruction. Thus, the procedures for DEEP drawing on the guaranty or surety bond are effective in Connecticut.

In conclusion, guarantees and surety bonds executed as described in R.C.S.A. §§ 22a-449(d)-109(g) and 22a-449(d)-109(i), respectively, are valid and enforceable in Connecticut provided: (a) the guarantee or surety contract satisfies the specific requirements of the Connecticut UST Regulations for these instruments; (b) the guarantee or surety contract meets all the elements of a valid contract, including the element of consideration, and there are no valid defenses to the contract; and (c) the guarantee or surety contract is either made in this State by an authorized insurer or, if made in this State by an entity other than an authorized insurer, is merely incidental to legitimate business or activity of the guarantor or surety.

Very truly yours,

GEORGE JEPSEN
ATTORNEY GENERAL

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