Reclamation Bond

Reclamation Bond

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Understanding Reclamation Bonds

The Bureau of Land Management (BLM) and some state government agencies that issue permits for mining operations require a type of surety bond—known as a reclamation bond— for businesses who wish to be permitted to mine or tackle other related operations at specific sites. 

Keep reading for more insight into what reclamation bonds are and how they work. 

What is a Reclamation Bond?

A reclamation bond offers a financial guarantee that a business that is mining or pursuing a related activity will return the land being disturbed to its approximate original state or an acceptable condition. The government agency and the operator will agree on what this condition is before the mining begins. 

Unlike other surety bonds that have standard bond amounts, reclamation bonds aren’t uniform. A form of cost analysis determines what the approximate cost is to reclaim the land after the mining operations end. The bond amount is set this way to ensure that if the principal (the mining company that takes out the reclamation bond) fails to return the land to the agreed upon state, a claim can be filed against the reclamation bond in order to recoup the money required to finish the job. The type of mining operation and the degree of impact on the land influences this cost. 

As briefly mentioned earlier, reclamation bonds don’t only apply to mining activities. Any operation that alters land to the extent that it can’t recover on its own post-operation can require a reclamation bond. For example, both waste recycling plants and wastewater disposal facilities have to secure reclamation bonds in order to operate legally.

Essentially, reclamation bonds hold mine operators and other businesses responsible for the damage their operations can cause to the environment, including both land and water. If reclamation bonds didn’t exist, it would be extremely difficult to hold businesses responsible for the damage they’ve done to the land. Being able to file a claim against a reclamation bond is a much more efficient and effective way to hold businesses accountable and to secure the funds needed to repair land. Because reclamation bonds give businesses financial incentive to restore the land, not just abandon it after a project is complete, this type of surety bond can make a major positive impact on our environment. 

How Does a Reclamation Bond Work?

Let’s say that a mine operator doesn’t perform the land reclamation after the completion of a project as required by their reclamation bond. At that point, a claim can be filed against the reclamation bond and the surety (the company that issues and backs the bond) will investigate the claim. The surety will pay out the claim if their investigation reveals it to be valid, but the principal (the party that takes out the reclamation bond) will have to pay the surety back. The principal will owe the full claim amount and may also owe fees and interest. It’s a common misconception that surety bonds act like insurance policies, but they aren’t a form of insurance for the party that holds the policy. They act more like an insurance policy for the party that stands to be damaged by the principal’s actions. The best way to not have to pay out a claim is to avoid incurring one altogether. 

Who Are the Parties Involved in a Reclamation Bond?

If a business needs a reclamation bond, the BLM or another government agency will inform them if they need to secure this type of surety bond before they can move forward with their project. There are three main parties involved in a reclamation bond:

  • Principal. This is the party who needs to take out the surety bond and in the case of a reclamation bond is the mine operator.

  • Obligee. This is likely either the BLM or another government agency and this is the party that requires the reclamation bond. 

  • Surety. The surety is the company that issues the reclamation bond, investigates claims, and pays out the claims. 

How Much Does a Reclamation Bond Cost?

Again—reclamation bond amounts are custom and are determined primarily based on how much it is estimated to cost to return the land to a similar state to how it was before the mining or other project began. 

The bond premium (aka how much the principal pays for the surety bond) is then based on a percentage of the bond amount. A few factors are taken into consideration when determining that percentage, including your industry experience, years in business, business credit score, and personal credit score. Your personal credit score plays the biggest role and the higher your personal credit score is, the less it will cost you to secure a reclamation bond. Because of this, it’s a good idea to work on improving your personal credit score before you apply for a reclamation bond or renew an existing one.

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