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.

Mr. TAYLOR. And it has to be one of those groups and you are telling me that you have a mechanism to collect from every one of these insurers should the worst happen?

Mr. SHEEHAN. Yes, we do, and I think to the credit of the insurance industry and certainly to the credit of the P&I Clubs, they have stepped forward in 99.9 percent of the cases and come forward willingly to the claimant. They have come forward to pay for removal costs so we have not had to exercise that particular provision except in probably less than 10 instances over the last 20-some odd years.

Mr. TAYLOR. Just one last question and I will put it up to the panel. I have noticed that you pay the same fine whether you have the single hull and you wait to the last day to go to the double hull or if you have a double hull. Since previous testimony before the committee said that something like 95 percent of all the spills that occurred in this country could have been prevented with I double hull, wouldn't it make sense to give people a financial incentive to go to double hulls, just as smokers get a break on their health insurance and people with fire alarms get a break on their homeowners insurance? If you can prevent a problem, it would make a heck of a lot more sense than trying to clean it up afterwards.

Mr. SHEEHAN. I, sir, have been a long-term proponent of double hulls. I think that the concept is superb. I think that the high levels of liability within OPA 90 also serve as a great incentive. I think that if you were a shipowner, I would want to have a double hull to ultimately limit the potential of my liability. I am not sure how we would craft something like that. I know it is an interesting concept.

Admiral KRAMEK. I think it is an insurance company issue, too. How safe you are should be determined by the industry as to how much your premiums should be. And in marine safety circles, we have talked about that for years. I would assume that people who have safer operations would have less of a cost of insurance for any risks that they may be taking. That doesn't particularly affect this rule, but it certainly can be debated.

Mr. TAYLOR. Does the Coast Guard have the authority to do that under the present?

Admiral KRAMEK. No, we don't have any authority to do that under the present law.

Mr. TAYLOR. Thank you, Mr. Chairman.

Mr. TAUZIN. Thank you, Mr. Taylor.

Gentlemen. Mr. Sheehan, in particular, you assert that there is a distinction between a guarantee and an insurance company; right? Is that why you haven't allowed the policy defense for nonpayment of premium?

Mr. SHEEHAN. My assertion is that there is a difference between an insurance policy and a guaranty, yes, sir.

Mr. TAUZIN. That distinction, as I take it, was also recognized by Congress, and I want to read you the statute precisely. It said: Financial responsibility under this section may be established by any one or by any combination of the following methods which the Secretary or the President determines to be acceptable. And then Congress lists the various forms of commercial indemnity. Congress listed: evidence of insurance, surety bond, guarantee, letter of cred

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