Managing Environmental Liabilities through Contracts

January 2003

by Jeff Slivka, ARM
Gallagher Environmental Risk & Insurance
Arthur J. Gallagher & Co.

Many are aware of the various contractual methods for managing the variety of risks found at construction sites. One area that needs a bit more attention is the real and perceived environmental hazards or contamination routinely found at construction sites. This article explores the uncommon provisions for managing environmental risk through contracts.

Owner’s Disclosure of Environmental Information

First and foremost is information. Typical disclosure statements must specifically reference information relative to the “environmental” condition of the site. Such information could include the obvious—underground tanks information and environmental assessments. But there should be no problem requesting information relative to various permits issued to the site (if working at an active facility), such as notices of violations or fines for releases or discharges and various hazardous substances used or in use at the site.

Depending on the level of effort you want to put forth, there are even Web sites that can provide you with environmental information about the site you are looking to put your workers on. All known conditions should be disclosed.

Preexisting Contamination Clause

Similar to typical indemnity agreements but specific to both known and unknown contamination, a preexisting conditions clause indemnifies the contractor in the event environmental liability attaches merely because of the existence of contamination. For example, if there is existing contamination of an owner’s site due to leaking underground tanks, historic disposal practices, etc., the owner or general contractor will indemnify the contractor for such liability. However, these clauses usually will not indemnify the contractor for exacerbation of conditions or for other contamination releases that the contractor causes by its own actions or omissions.

Preexisting contamination clauses are typically constructed from constituents found in environmental assessments but can also be constructed with general terms attached. The latter should extend to claims that arise out of, are related to, or are based on actual, alleged, or threatened discovery, discharge, dispersal, release, escape, migration, or seepage of any contaminant or pollutant. Contaminants or pollutants can reference various environmental statutes, however, with the way society has sensationalized the issues surrounding “toxic” mold, it would be prudent for the creator of such clause to ensure that microbiological, bacterial, mold, fungus, etc., are found in the definition as well.

Change in Conditions Provision

A change in conditions, specific to environmental conditions or contamination, should also be contemplated. Many times, contamination is found during the course of work. For example, the excavation contractor finds the leaking underground tank no one suspected was there, or the drywall contractor performing work in a hospital finds mold infestation. Does the contract spell out how each party is supposed to respond? The answer is sometimes, yes, but many times, no.

A change in conditions clause will allow for the owner and contractor to ensure proper procedure is followed in the event problems are encountered. Will the contractor be responsible to remediate or remove newly discovered contamination? Will it be the responsibility of the owner? Are change orders warranted? What about work stoppage as a result of the contamination? All these seem so obvious until it happens. Then we go to the document that is supposed to govern the relationship, and find it’s not clearly defined.

General response procedure on the part of both parties should be clearly spelled out in order to solidify how each should respond. However, this clause should be general enough to apply to a myriad of unexpected conditions.

Responsibility for Ownership, Transport, Arranging, and Disposing of Waste

Tremendous liability can be assumed when transporting and disposing, or arranging for the transport and disposal of various wastes generated at the site. Such language should ensure the owner acknowledges the fact that the contractor is not and never intends to become an “arranger,” “operator,” “generator,” or “transporter” of hazardous substances as defined by the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA, also known as “Superfund”). In keeping with this mindset, contractors must also be careful not to sign waste manifests as owners or generators of hazardous wastes.

To date, there have been many contractors identified (maybe misidentified) as potential responsible parties under Superfund laws for arranging for the transport of hazardous waste. Ultimately, this may not relieve a contractor of its responsibilities under Superfund but may act as a solid first line of defense.

Environmental Insurance Requirements

Although the environmental insurance marketplace has developed to the point that typical contractor’s pollution liability (CPL) coverage is extremely affordable, very few contracts require it. A CPL provision in the contract will provide a few benefits as follows.

• Reinforces the indemnity provision in the event the indemnitor no longer has the financial capability to fund a loss.
• Acts as a “pre-qualifier” since most environmental underwriting requirements are quite rigorous.

When it comes to insurance, thought should also be given to whether or not it should be specific to a project, or is evidence of general environmental coverage enough?

Conclusion

Using one or all of the above provisions—along with other typical provisions such as a clear scope of work (the scope of work or services must clearly stipulate if the contractor is to perform environmental services), health and safety requirements, limitation of liability statement, etc., may reduce exposure to environmental risk. However, in the end, it’s still only a contract and regardless of how clear, concise, and complete it may be, it still may not completely remove a party from environmental liability.

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