so it doesn't share the same concerns that the rest of the clubs do. So there doesn't appear to be total unanimity with respect to the Clubs' position.

Mr. PICKETT. The part that concerns me a bit is this issue about the availability of insurance to the smaller or less financially stable companies and the parallel in my mind is that of the risk that is associated with the writing of bonds for construction purposes, that this has gotten to be quite a high-risk business and it has come to the point that in many cases there are only a very few companies that can get a responsible insurance company to write a bond for them. Is that where we are headed in this business with the bonding of the oil transporters?

Mr. SHEEHAN. I don't believe that that is the case. I would expand a bit on my previous answer.

If you are also addressing the inland, the barge industry, which is a large component of this particular industry, that delivers petroleum, we have had no indication that the Water Quality Insurance Syndicate, which currently provides guaranties upon which we issue certificates of financial responsibility, we have had no indication that they are not going to continue that practice.

And, indeed, I have talked to their representatives and as far as I am led to understand, they are going to be able to continue to provide that. And indeed, they can expand their marketplace to provide coverage to a wider group in the tank-barge industry than is currently served today.

Mr. PICKETT. Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Pickett.

The gentleman from Virginia, Mr. Bateman is recognized.

Mr. BATEMAN. Thank you, Mr. Chairman. I have very few questions, frankly, because I have not had the opportunity to go through the material that is here before me. I want to comment, though, that I have listened with very grave trepidation about where we are and where we appear to be heading.

I have not been one of the great fans of our oil spill liability solution. I think from the beginning it has been fraught with the likelihood that we wanted to feel good and sort of a "wouldn't it be nice" approach that too often ignored the realities of the actual world of commerce and the marketplace.

What I am hearing today seems to reinforce, frankly, those concerns. I find it very disconcerting that we are embarked on something where we are dealing with wonderful concepts, but without any confidence that they are rooted in any reality. And concepts are nice, but not when they defy reality.

To sit here and to hear it said that there is no defense to someone who is insured or guaranteed of losses from some liability occurrence, even though they haven't paid a premium, just defies any logic. How do you possibly get anyone to accept that kind of a risk if they are not even assured of getting paid whatever premium or fee was supposed to be the commitment? Why would anybody undertake to do anything if we are going to do such things as that? I can assure you, Mr. Chairman, that you more than tweaked my interest, and I will be visiting this issue and will want to discuss it with you and my colleagues on the committee, but I can't tell you

that I have heard anything that was much more disquieting than what I have been hearing this morning.

Mr. TAUZIN. Thank you, Mr. Chairman Bateman.

The gentleman from North Carolina, Mr. Lancaster.

Mr. LANCASTER. Thank you, Mr. Chairman. I would like to know a little bit more about how self-insurance will work. Will it be possible for a major to simply show assets of an amount that is satisfactory to you or will it be necessary for those assets to be in some way segregated by trust or other instrument so that they will be available only for purposes of the guarantee?

Mr. SHEEHAN. Thank you, sir.

The self-insurance is a component which we currently use in the certificate of financial responsibility program. It is one which you basically take a look at the size of the largest vessel in the fleet that you need to insure. There are two tests for it.

You basically take a look, an accounting of your U.S. assets; and you subtract your worldwide liabilities. You then subject it to a working capital test, which is basically your U.S. short-term assets less short-term worldwide liabilities. You don't have to set it aside. The working capital provision is one which we nominally use to make sure that there is adequate flexibility and adequate liquidity but we recognize, sir, that there are quite a number of companies which are sometimes fully invested in long-term securities. They do not have a lot of cash sitting around, and they do not have it in trusts. We have provided within the rulemaking itself a provision to waive that. It is not an automatic waiver, but we have done it in the past and it takes into account the overall financial stability of the company. We have a series of marine examiners who have been doing this for a number of years who look at this.

Mr. LANCASTER. Is this guarantee in some way filed under the uniform codes of commercial-UCC in some way that it then becomes a lien? Or is it possible for those assets to be encumbered subsequent to the giving of the guarantee so that at the time the guarantee is called, those assets are not available for the purposes for which it was given?

Mr. SHEEHAN. I don't believe it is filed as a lien. And I will check with my counsel. I don't believe that we do that. On some companies we require a six-month financial accounting to make sure that that situation doesn't occur.

Mr. LANCASTER. Would it be possible for companies to give guarantees for third-party carriers or will it be only if they are a certified guarantor?

Mr. SHEEHAN. No, sir, they could provide coverage for third-party carriers. I have been approached by one company who is interested in doing that already. They would basically have to meet the selfinsurance tests, but that would be an option for them to do.

Mr. LANCASTER. It would not be the same test that you would require of guarantors, but would be the same test that you now require of self-insurers.

Mr. SHEEHAN. That is correct, sir.

Mr. LANCASTER. Is that a significant source, you think, of guarantees that might be used for third-party carriers? Mr. SHEEHAN. I don't know. It is a possibility.

As I indicated, I had a visit the other day from a company that had indicated they wanted to explore this because they were looking at it a constructive way, how to comply with this and how to provide coverage to some of their third-party carriers. I am not sure at the end of the day what the mix is going to be in terms of self-insurance, surety bond coverage, straightforward insurers. It is too soon to tell.

Mr. LANCASTER. I share the incredulity of the Chairman and Mr. Bateman with regard to the defense or lack of a defense for nonpayment of premium. And so there must be an explanation that we are missing as to why that is in place.

Is it simply anticipated that everybody will prepay and that before they undertake any shipment that full premium will be paid for the guarantee and that there will not be any basis on which, as in all other commercial instances, there are installment payments spread out over the course of a year?

Mr. SHEEHAN. With respect to surety bonds, those are prepaid. With respect to some of the insurance entities which are being examined or will be shortly, I understand that at least one is going to require prepayment.

I think that the matter really hinges on the difference between, as Mr. Horowitz pointed out, standard insurance coverage and a guaranty. They are different entities. And if you are going to have a guaranty, it has to have some ironclad provision for it.

Now, when we receive notification of cancellation of a policy-for example non-payment of premium-we will then cancel the certificate of financial responsibility, which means that that ship will not be able to trade. They are not on the hook forever is I think the key point. In today's system, when they haven't received payment for a premium, they, in turn, notify us. We in turn then cancel the certificate of financial responsibility.

Mr. LANCASTER. There are other guarantee instruments which are being used as a model here for which nonpayment is not given or not allowed as a defense?

Mr. SHEEHAN. I believe that under the international regime, which was spoken of earlier. Under the TAPS regime, as well as the Outer Continental Lands Shelf Act, which is in effect, that nonpayment is not able to be used as a defense.

Mr. LANCASTER. Thank you very much.

Mr. TAUZIN. Thank you, Mr. Lancaster. The gentleman from Maryland, is recognized.

Thank you, Mr. Gilchrest.

The gentleman from Mississippi, Mr. Taylor, is recognized.

Mr. TAYLOR. Thank you, Mr. Chairman. And I want to thank you for holding this hearing and for the staff putting together a really excellent briefing. I want to open this up to the panel.

I have been trying without much success for a few months to interest the tanker community trying to go to double hulls voluntarily, and one of the ways that I have tried to do that is I have said what if we limited liability for people who voluntarily went to double hulls with the idea that it is better to prevent a spill than to beat somebody over the head after a spill.

And I have had two interesting responses, one from the environmental community and one from the tanker owners and operators.

The environmental community doesn't want to reopen OPA 90 because they think there is unlimited liability and that they will be able to beat somebody over the head and the threat of that will prevent a spill.

Interestingly enough, tanker owners and operators don't have any interest in limited liability and reducing that. They seem to have no interest in going to double hulls even if we limited their liability. And I find that very interesting.

Now I heard talk, and I have nothing to back this up other than talk that they have figured out a way to beat OPA 90 by chartering offshore dummy corporations and therefore they have limited their liability because when the Coast Guard goes to collect, there is just a piece of paper somewhere and you can't collect money from a piece of paper. Interestingly enough, then the environmental community is really out of luck because you cannot get unlimited liability from a dummy corporation.

I wish the panel would respond to that, because I am hearing this too often for there not to be some fire underneath that smoke. Mr. SHEEHAN. Mr. Taylor, I think that you have certainly focused in on the genuine purpose of what the certificate of financial responsibility is for.

It is for exactly that instance when the ship owner-and the majority of them don't-but when the ship owner decides to take a walk away from his responsibilities that there be some surety of payment and surety of payment to claimants. The way that that is done is through the certificate of financial responsibility pro

gram.

Mr. TAYLOR. How would you explain, sir, and I am taking this strictly from the staff bulletin, so-anyway, on page 2 and 3 of the staff bulletin and particularly on page 3, any vessel navigating without a COFR in waters covered by OPA 90 may be denied entry. Well, if they may be denied entry, obviously they don't have to have a COFR even though page 2 would lead me to believe that they had to have one.

Mr. SHEEHAN. We may deny entry.

We take a look on all vessels that come to U.S. ports to see if they have a certificate of financial responsibility. One of the things that frequently happens is that enroute, either the operator will change, and if that is indeed a paper type of transfer of an operator from one name to another name, that by virtue of doing that, you invalidate that certificate of financial responsibility.

When we find that out, we query our information system and see that that has happened, we will then contact the operator. They in turn will then contact the guarantor to make sure that they actually do have coverage and that we are notified. So in those rare instances where they don't have a valid certificate, where their guarantor does not give us a binder, where there is no connection, we do deny entry to that ship. In some instances, we end up with situation where we detain a ship.

Mr. TAYLOR. But, again, going back to this first paragraph top of page 3, it says "may", not "shall". Does that mean some of them get in?

Mr. SHEEHAN. I don't believe so, sir.

Mr. TAYLOR. Then why does it say "may"?

Mr. SHEEHAN. Because it is the transitional situation with respect to the issuance of the underlying guaranties. Sometimes we end up with a situation where they have applied for a certificate of financial responsibility, we have mailed it to the operator and it hasn't arrived there yet, so they indeed have a valid one but it is not on board. And so in those particular instances, that valid one, according to the regulations, is not on board we would, in fact, let them in.

Mr. TAYLOR. Could a vessel carrying chemicals, oil or other hazardous substances over 300 gross tons enter this country without a certificate of financial responsibility, carrying these things as cargo and not as fuel?

Mr. SHEEHAN. The possibility exists that could happen. We have a very active enforcement mechanism to take steps that it does not happen. We have linked up in the past two years with our Office of Marine Safety to make sure that our port inspectors and indeed the U.S. Customs, which plays a role in this as well, have current information. Our number of detentions and enforcements have gone up rather drastically.

There could be a ship which slips in which has not given a port notification, for example, and that is a situation which could occur. You could have a ship which we didn't see. Our people didn't know about and Customs didn't know about.

Mr. TAYLOR. If you would please explain why you used word "may" instead of "shall." I always thought of that as sort of arbitrary enforcement; we will enforce for you, but not for you.

Mr. SHEEHAN. My counsel just advised me that those are the words which are in OPA 90 itself, that we may deny entry.

Mr. TAYLOR. Well, does that need to be changed?

Mr. SHEEHAN. I think it probably provides, with the enforcement regime that we have in place, the appropriate flexibility. There is a requirement that they have these certificates. This is an enforcement tool.

The denial of entry is an enforcement tool. There are other enforcement tools such as civil penalties and the ultimate enforcement tool is, I believe, seizure of the vessel.

Mr. TAYLOR. Getting back to the offshore corporations, how do you enforce that?

Mr. SHEEHAN. Through the underlying guaranties upon which we base the certificate of financial responsibility. In other words, that is one of the reasons that we have a direct tie and a direct-the ability to have direct action and direct agreement with the insurer between the United States Government and that insurer, exclusive of the particular operator. And that is the mechanism. It has worked in concept for

Mr. TAYLOR. And all of these insurers are United States corporations?

Mr. SHEEHAN. No, sir, many of them are foreign corporations. Many of them are currently P&I Clubs, Lloyd's of London, there are a variety of guarantors.

Mr. TAYLOR. Do you have a list of approved insurers.

Mr. SHEEHAN. Yes, sir.